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Three reasons to prioritise ESG reporting

Oct 29, 2020
Kevin Lynch explains why ESG reporting is fast becoming a critical pillar in the evaluation of organisational stability.

As we enter Climate Finance Week, a common question is: why should environmental, social, and governance (ESG) issues be a priority for my organisation? Among the many valid reasons, let’s take three – financing, brand and risk appraisal.

1. Financing
The requirements and desires of financial investors are changing, with sustainability taking a central role. Investors are increasingly using sustainability as a proxy for how fast companies can respond to changing market conditions, and ESG reporting is an excellent place to set out your stall. Add to this the broader rise of dedicated ESG funds and green finance, and sustainability initiatives can open up new finance channels for organisations.

2. Brand
Detailed ESG reporting is a mark of a conscientious brand and is received positively by employees, customers and suppliers. For employees, having a clear and tangible understanding of their organisation’s sustainability policies and the progress thus far improves workplace satisfaction and is viewed favourably by prospective employees. Complementing this, customers and suppliers are requesting better standards from the brands they engage with. By leading with clear policies and highlighting achievements, companies can stand out from the crowd.

3. Risk appraisal
Well-developed ESG reporting provides a nuanced understanding of non-financial company risks. Interlinking ESG outputs with company risk management can deliver a competitive advantage for organisations in unstable economic times.

If we accept ESG as a valid endeavour, the impetus is clear. The next question we need to ask is: how do we map our ESG goals?

Ambiguity is a common pitfall for effective ESG reporting, with many companies trying to address a fog of war as they compare themselves to their competitors and their sector. Without mandated standards, however, this comparison is often not straightforward. To address the need for standardisation, an EU initiative is currently curating a shared taxonomy for sustainable activities. This shared taxonomy will be delivered at the end of 2022, which is a welcome step. But in place of the awaited taxonomy, an honest self-appraisal and an evaluation of sectoral best practice by the board and management team can position a company for strategic ESG success.

Often central to self-evaluation, a materiality approach can provide a focus for tangible priorities, allowing a switch from compliance-based incentives to stakeholder-led initiatives that relate to wider-held business objectives. Embedding these initiatives throughout the business will enable leaders to monitor their success, make use of in-situ reporting methods, and ensure that the process is not a box-ticking afterthought.

Having set or revised your ESG goals, you need to know how you can meaningfully measure progress against those goals. Frameworks such as TCFD (Task Force on Climate-related Financial Disclosures), SASB (Sustainability Accounting Standards Board), and GRI (Global Reporting Initiative) are beneficial. However, without well-defined goals aligned with strategic objectives and linked to measurable outcomes, the implementation will always fall short. By centring measurement in your ESG plan from the outset, it is possible to continuously evaluate not only your successes and failures but importantly, the areas where you lack clear information. When information for ESG progress is not readily available or well understood, this challenge should be faced head-on, and the first step is understanding the gaps.

With many companies acknowledging ESG as a priority, many are asking: who is best-placed to oversee ESG delivery? Finance departments are in a unique position to support the delivery of ESG reporting and analysis, with responsibility spanning strategic objective-setting, financial and non-financial disclosures, and risk management and appraisal. In uncertain times, accountants provide trusted guidance in evaluating the continued stability of their organisations, and ESG reporting is becoming another pillar in this evaluation process.

Kevin Lynch is Chief Technical Officer at The Information Lab Ireland.