- Companies need sustainability-related reporting standards to measure social and environmental impact more effectively and to reach the Paris climate goals.
- The business world is soon likely to see some of the most significant innovations in corporate accounting and reporting in decades.
- New research highlights five ways companies can prepare.
An increasing number of companies are embracing sustainability goals and seeking to reduce their carbon footprints. And yet we still lack global standards that allow the public and investors to evaluate how sustainable a company is.
A robust set of sustainability-related reporting standards will help channel investment towards companies that have a positive social and environmental impact. This will support progress in preventing a climate catastrophe, as well as addressing other social and political problems.
Over the last 18 months, important progress has been made toward establishing sustainability standards. The International Financial Reporting Standards (IFRS) Foundation has proposed an International Sustainability Standards Board (ISSB), which is set to launch at COP26 in November. In a recent communiqué, the G7 Finance Ministers and Central Bank Governors expressed support for the ISSB and called for mandatory climate-related financial disclosures.
Have you read?
This means that in the coming years, the business world is likely to see some of the most significant innovations in corporate accounting and reporting in decades. What can companies do to start preparing for these changes? New research by Oxford Analytica and EY, The future of sustainability reporting standards, makes the following five recommendations:
1. Don’t wait for sustainability reporting to be mandated
Companies have a great opportunity now to prepare for new regulations around sustainability reporting, and commit to transparency and accountability. While the IFRS and other regulatory efforts are expected to take a “climate-first” approach, it will be important for companies to consider reporting across a range of environmental, social and governance (ESG) areas.
This means setting out to gather information, in order to inform company strategies, manage risks and achieve a stronger, more sustainable performance over the long term.
Companies should begin by identifying the metrics most relevant to their sector, strategy and stakeholders. The Stakeholder Capitalism Metrics, developed by the World Economic Forum International Business Council, are a good starting point.
2. Put environmental, social and governance and sustainability reporting on the board’s agenda
For companies to remain competitive, their boards must understand how ESG investing and stewardship trends are impacting access to capital and relationships with investors. They also need to be aware of private market and regulatory initiatives relating to ESG areas. Boards should monitor international developments in sustainability reporting and keep track of how ESG data providers view their company. Furthermore, they should assess which ESG areas are most relevant to their company. These will then need to be integrated into the company's broader strategy and enterprise risk management.
3. Prioritize building trust in sustainability reporting
As organizations report and disclose more ESG information, they should expect to face more questions. These may be around the depth and reliability of their disclosures, risk exposure and resilience, as well as concerns over so-called ‘greenwashing’. Companies will need to build trust by ensuring that their sustainability reporting has robust processes and controls with a supporting audit trail, similar to those for financial reporting.
An important part of getting ready for the new regulations will be preparing for a sustainability audit. The European Commission’s proposed Corporate Sustainability Reporting Directive will, for example, require large companies to seek ‘limited assurance’ around their reported sustainability information from either their statutory auditor, or an independent assurance services provider.
4. Integrate the finance function
A company can only deliver value to all its stakeholders when it draws on the skills and input of the entire organization, under the shared vision of leadership. Finance departments can play a key role in preparing for sustainability reporting. They will need to understand what the public and investors need to know about sustainability, and translate that into the most relevant metrics and disclosures.
Reporting must be trusted, credible and relevant to stakeholders, and make a clear link between financial and non-financial information. Chief Finance Officers and financial controllers can use their experience and knowledge to shape non-financial reporting processes and controls. The finance function can help to establish effective governance of sustainability reporting, and obtain independent assurance over non-financial processes.
What is the World Economic Forum doing to help companies reduce carbon emissions?
Corporate leaders from the mining, metals and manufacturing industries are changing their approach to integrating climate considerations into complex supply chains.
The Forum’s Mining and Metals Blockchain Initiative, created to accelerate an industry solution for supply chain visibility and environmental, social and corporate governance (ESG) requirements, has released a unique proof of concept to trace emissions across the value chain using distributed ledger technology.
Developed in collaboration with industry experts, it not only tests the technological feasibility of the solution, but also explores the complexities of the supply chain dynamics and sets requirements for future data utilization.
In doing so, the proof of concept responds to demands from stakeholders to create “mine-to-market” visibility and accountability.
5. Contribute to the process of setting standards
Many of the world’s leading companies acknowledge that ESG issues are integral to how they – and other organizations – create value over the long term. They also know that the way in which information is disclosed could potentially make a big difference to how investment capital is channeled in future.
Companies don’t just want to wait on the sidelines while the process of setting standards takes place around them – they would much rather be actively involved, contribute and learn valuable lessons from the experience. Those companies that respond to government consultations, participate in meetings with regulators, and start to disclose sustainability metrics now, will benefit from greater credibility in those standard-setting discussions. For example, the companies that have committed to reporting the World Economic Forum International Business Council Stakeholder Capitalism metrics are sending a powerful message that the private sector is ready to engage on these issues at the highest levels.
Companies can show that they contribute to making the place a better place to live, work and do business. This means focusing on sustainability efforts and communicating them to the public and investors. Now is the time for companies and their leaders to work together with regulators and civil society to achieve consistent, global standards that will help define corporate reporting and accountability for the next generation. The planet won’t wait – and neither should we.
The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.