Reporting and Trust
The post-COVID imperative requires much better ESG reporting and disclosure. CEOs and their executive teams should focus on five short-term priorities.
Investors are increasingly interested in responsible investment, including factoring ESG issues and appropriate disclosures into their strategies.
All of this will require more and better information—not just to improve transparency, but to drive change. By improving the quality of information out there, companies will empower stakeholders, including investors; the latter will reward companies that are delivering for society and managing environmental, social and governance (ESG) risks, and they can apply pressure to organisations that are not.
At the moment, the only thing we can know about a company with a high degree of certainty is its current financial performance. That is not nearly enough to meet stakeholder expectations today, let alone in the future.
Already, investors are seeking better information. A full 88% of institutional investors say their firm monitors ESG indicators to inform investment decisions. This demand will only become more intense as the importance of robust ESG information grows. PwC analysis suggests that over the next five years, the total amount invested in ESG mutual funds in Europe could grow at a compound annual rate exceeding 25%. If companies want to access deep capital markets, robust ESG reporting is increasingly a condition of entry.
At the same time, proposals for greater disclosure of information beyond traditional financial numbers are coming from a broad range of stakeholders. Over the last year, the European Commission has begun revising its Non-Financial Reporting Directive, the International Organization of Securities Commissions (IOSCO) has set out its intention to accelerate the harmonisation of sustainability standards, and the US Securities and Exchange Commission (SEC) has amended its rules to enhance human capital disclosures. Consumers, employees and NGOs increasingly want to understand the impact companies have on society and expect to be able to find information they can trust.
This pressure for greater transparency comes together in the search to define common, objective and enforceable standards for non-financial information, a process which is still at an early stage. At the moment, there are myriad yardsticks for reporting everything from carbon footprint to gender diversity, all with different levels of ambition. At the very least, it is hard for users to map different frameworks onto one another, in order to make meaningful comparisons, and hard for companies to know which standards are most influential. It will be some time before there is a commonly agreed style of non-financial reporting comparable to GAAP in the financial arena—but we are moving in that direction.
There is also significant progress towards building trust in disclosures through assurance. Stakeholders expect financial information to be audited. The same need is present for equally important non-financial information.
The direction of travel is clear, but there is a lot of uncertainty about the precise path and the pace of change. Here are five issues for CEOs and executive teams to consider as they contemplate a more transparent future.
The non-financial reporting revolution is coming fast, and 2021 will be crucial. Companies that are not prepared will lack access to capital, sacrifice value, suffer damage to their reputation and ultimately may end up falling foul of the law. Transparency leaders, on the other hand, will build trust among all stakeholders, differentiate themselves, enhance the effectiveness of capital markets and help society advance.
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