ESG Reporting 101: What You Need To Know Before Compiling Your Next ESG Report
CFOs are increasingly expected to report on facets of the businesses that they operate in that do not form part of a traditional annual report. We unpack what ESG is and share tips for reporting on these increasingly important metrics.
In a new paper looking at the future of sustainability reporting standards, the authors found that the next 12 to 18 months are likely to result in some of the most significant innovations in corporate accounting and reporting we have seen in decades.
Currently, many companies are confused as to how best to report their environmental, social, and governance (ESG) performance in a way that will be credible to shareholders and other stakeholders. Much of this confusion stems from a plethora of sustainability reporting frameworks available.
While jurisdictional and global standards are being developed, CFOs have the opportunity to innovate within this space and to decide on custom metrics that make the most sense for the businesses they operate in. We cannot wait for global consensus regarding reporting standards, the future is already here and it is imperative that organisations adopt ESG reporting without further delay.
With that in mind, let’s take a closer look at the three pillars ESG is comprised of and outline some guidelines for reporting in this space.
What is ESG reporting?
Environmental, social, and governance reporting tries to capture costs and benefits that don’t make it into conventional annual reports. Although not standardised, these could include aspects like a company’s air emissions, the measures a firm takes to prevent bribery and corruption, or money spent on community outreach.
The idea of ESG reporting is not new, but it’s picked up momentum in the last few years, particularly after the Paris Climate Accords.
1. Determine your focus and provide the assurances and disclosures needed to go along with them
In the absence of voluntary corporate ESG reporting, South Africa will likely miss the goals it agreed to at the Paris Climate Summit. A global framework is currently under development by the International Sustainability Standards Board (ISSB) and is expected to be published later this year.
Daniel Raubenheimer, CFO at USA-based Silon, expanded on the new ISSM standards in our CFO Talks podcast interview with him. “Essentially what this will create is a lot of transparency within the market, it will give our investors the high-quality information on the sustainability aspect of the company, which to this day it has not been a legal requirement for a company to disclose.”
In the lead-up to the publication of the ISSB standards, prudent CFOs would be wise to focus on setting their own business-aligned standards and getting into the habit of generating the necessary assurances and disclosures to go along with these standards. CFOs will be expected to provide a robust ESG audit trail to boost investor confidence in the near future, including underlying assumptions, models, and a paper trail of the internal controls underpinning the information provided.
2. Steer clear of any metrics that may be perceived as corporate greenwashing
The lack of standards and infancy of ESG reporting leaves room for a lack of transparency.
“There are some complexities around ESG that we need to sort out with time,” says Earl Steyn, CEO of Draftworx. “One company may make bombs for example and acquire the gunpowder or the chemicals through sustainable methods and by that measure alone will definitely have good governance. They might be incredibly investor-friendly, but then they aren’t measuring the social impact of their business.”
Many businesses are preparing for future sustainability disclosures and committing to transparency and accountability before they are mandated. Now is the time for companies and their leaders to work together with regulators and civil society to achieve consistent, global standards and to contribute to this critical process that will help define corporate reporting and accountability for the next generation.
Technological improvements also mean there is an incentive for CFOs to get ahead of the problem. “I think the way data collection and big data is going, in about 12 to 18 months, I won’t need your reporting for me to estimate some of your measures. We can impute a result for your company on my Bloomberg screen. So I will have data, whether I can trust it or not is a different story, but the fact is that analysts are going to start making investment decisions about the stock based on the data they see. And your challenge is to make sure you’ve got some sort of narrative that can explain that alternative data,” says Jones Gondo a senior credit strategist at Nedbank.
3. Adopt an integrated approach
Reporting must be trusted, credible and relevant to stakeholders and make a clear link between financial and non-financial information. CFOs and financial controllers can instill discipline into nonfinancial reporting processes and controls, based on their experience and knowledge of leading practices to support sustainability and ESG reporting.
“It starts by recognising that the leadership required to address climate issues will need to be more strategic, integrated, and responsive than we’ve ever been in the past,” explains David Wray, President of the DFCG International Group. “Sustainability matters will require a better understanding of the business, and the business activities that impact biodiversity – this is about risks and, of course, opportunities. For instance, it means understanding your company’s potential over-exploitation of resources, habitat loss or restoration, fragmentation or degradation of ecosystems, pollution, the introduction of exotic species, or contributions to climate change.”
4. Consider ESG alongside broader financial imperatives
A strong focus on ESG does not require a trade-off with core business priorities. For corporates, ESG must work alongside financial factors to save, not increase, costs. It is only in this way that companies will give these critical issues their full attention.
Clear action plans on environmental and social priorities strengthen the operational resilience of a business and strengthen competitiveness by cutting costs.
In our CFO Talks podcast interview with Christian Campbell he observed that, “As accountants we have to see how best we can factor the risk into running a business with the issues relating to climate change because climate change will affect our pricing and will affect the scenario in which an organisation operates.”
Essentially, doing good is good business.
5. Invest in ESG training, including obtaining a specialised ESG License
The driver of ESG reporting will be the CFO, which means that CFOs need to be at the forefront of the latest developments in the area and need to demonstrate that they have the requisite skills to provide their organisations with comprehensive ESG reports. To respond to this demand, SAIBA has developed it’s Climate and Sustainability Reporting Executive Education and License.
SAIBA CFO, Nicolaas van Wyk explains that currently, “the CFO is focusing on three reporting areas, the traditional IFRS, then secondly, business efficiencies, and then because of the difficult economic circumstances we are in, the only way that you can still maintain the bottom line is through better efficiencies. The last one is then climate change. What is happening internationally, through the various CFO organisations from Mexico to France to South Africa, Italy, Germany, Tunisia, Morocco, is that we have all started working together to empower the CFO. We have developed a training course and support mechanisms to support CFOs in compiling their ESG reports.”
“The stakes are very high, and we want to make sure that CFOs are fully aware of the coming changes,” concludes van Wyk.
Learn more about SAIBA’s Climate and Sustainability Reporting License or listen to the full interview with SAIBA CFO Nicolaas van Wyk for more context around this new executive education offering.