Episode 4: ESG Reporting

Full transcript

Peter Englisch: Hi everyone. I'm Peter Englisch. Welcome to the fourth in our podcast series Up Next For Your Private Business. In earlier episodes, we have discussed three aspects of PwC's EPB Heatmap. Looking at first, what makes an enabling environment for private businesses? Then deep dive into two of the Heatmap’s seven categories; the tax and regulatory regime, and public health.

Now we're going to drill down on our fourth theme, ESG. Which, as we all know, stands for Environment, Social and Governance. I’m happy to welcome today here with me, Nadja Picard, our Global Reporting Leader at PwC. Welcome, Nadja.

Nadja Picard: Thanks for having me, Peter. 

Peter: First some context, in the Heatmap, we assess countries’ ESG scores based on four criteria: the global corruption index, percentage of energy from non-fossil fuels, gender gap and CO2 emissions per capita.

Different jurisdictions are scored based on these criteria, but something that applies everywhere is that private businesses are the backbone of the economy and the biggest contributors of employment and GDP growth. So it's vital for the future of all economies and societies, as well as for the planet, that private businesses embrace ESG.

Also, the Edelman Trust Barometer shows that companies enjoy a high level of trust. But trust in business leaders has declined. Commitment to ESG can break the cycle of distrust. Nadja, it seems that we are hearing a lot about ESG reporting these days. Why should ESG reporting matter for private businesses?

Nadja: Peter, let me start with applauding you and your team for this really innovative approach of creating this Heatmap and finding very telling indicators for the ease of doing business for private companies. I think reporting is fundamentally the basis for decision-making for people to whom this reporting is addressed or who are just interested in this reporting.

So, how does this relate to ESG reporting then? Well, it's really, for three reasons. First, while private businesses don't have public investors, they do have a lot of other stakeholders; suppliers, customers, employees who want to work with, or for a company that behaves sustainably. Younger talent especially wants an employer with a sustainable business story to tell. And it also builds a good reputation with the media, going back to that trust comment that you made earlier. 

Public companies who attract the attention of investors regarding their ESG reporting, are very often customers or even suppliers of private business. With that increased focus of regulators and ESG reporting standard centres on a company supply chain, customers and suppliers may demand ESG information from private companies.

Private businesses also need to fund themselves. And not always only from their own cash flows. Sustainability is increasingly a requirement for financial institutions, insurance companies, banks. People will provide capital and loans to private businesses. So that's why it also matters to private business.

And lastly, very simply, regulation. I hate to mention that because we should be doing things not because they are regulated, but because we want to do them, but particularly the European Corporate Sustainability Reporting Directive will not only affect listed companies, but all larger businesses, including private ones.

And it may also affect private business outside the European Union, if they have subsidiaries and businesses within Europe. 

Peter: So indeed private business owners don't like regulations because they are entrepreneurs, they’re creators. Obviously there are multiple reasons why non-financial reporting is, nevertheless, very important for private businesses.

How do you think the reporting of non-financial performance will evolve over the next few years? 

Nadja: Non-financial reporting globally but particularly within our region, EMEA (Europe, Middle East and Africa), Europe will be mostly driven by the European legislation. Again, the upcoming Corporate Sustainability Reporting Directive will apply to publicly listed companies, but also to non-listed companies. And they call them large companies, but that criteria is not really very large. 

Just to give you a sense, large companies start with companies that exceed 20 million total assets, 40 million in revenue, and more than 250 employees on an average basis so, it's not really massive per definition. So, that means if you or your company have subsidiaries in Europe, you would have to report and you may have to report on each subsidiary or provide a consolidated report.

So the ESG issues that we are being faced with are the drivers of that reporting. Climate, pollution, biodiversity, but also a lot of social issues, such as health and safety, human rights, modern slaveries. All these will be captured in disclosure requirements and the parameter is not necessarily limited to your company, but really goes beyond also covering your supply chain.

So, the disclosures, particularly of those of the European union, will look at the impact on enterprise value. So, how do these issues affect you as a company? But they will also look at the impact that you as a company have on society, the planet and the people. So it also very much looks at your sustainable behaviour as it impacts others.

So that's the one side, that's the European side with the European legislation. We also may have heard that under the IFRS (International Financial Reporting Standards) Foundation, there is a new standard setting body. Basically setting out to provide globally accepted sustainability disclosure standards. It's called the International Sustainability Standards Board (ISSB), and we really expect broad adoption of these standards that the ISSB will develop, but it still needs to happen.

So, regulators and countries still need to adopt those ISSB standards as they are being prepared and adopted. What we're really, really hoping for and what we are trying to influence is that there is a really strong alignment between the European standards and the ISSB standards because only really clear and globally accepted reporting will drive the behaviours that I mentioned initially.

Peter: Well, that's very interesting. And in fact, there have been different players in the past, trying to give some direction and standards into the non-financial reporting. And we all know that entrepreneurs and business owners can work under difficult circumstances, but what they need is clarity, clarity on what is required.

And it seems that the ISSB has at least the ambition to provide this clarity and standards going forward. So therefore, let me continue to ask you one more question on the ISSB. So what is your personal expectation and the perspective regarding the future role and development of the ISSB? Is this really a standard board which has a likelihood of succeeding on that mission?

Nadja: I think they are because everybody is really determined to solve the issue of diverging standard setters and initiatives, and frankly, sustainability disclosures that don't lend themselves towards comparability. And the issues are really too important, especially around climate right now, which is the focus of everybody, to leave it up to diverging disclosures and just a haphazard disclosure here and there.

So everybody is really getting behind the ISSB, and they started their work already. The board doesn't even exist. The board members are not even appointed yet, but there is a group of the willing, the technical readiness working group composed of some existing standards setters already. And they have started to prepare initial draft standards.

It's not really an exposure draft, it’s called working papers, prototypes, and there's one prototype for sort of the general disclosure standards. So how should you be thinking about it? What does materiality mean under the circumstances? How will the standards be built up and organised? So that's the general framework on sustainability reporting and there is already a prototype around climate.

It has some weaknesses, but that is why they are starting the discussion early, but it already gives a very clear sense of direction on where things are going. After that the ISSB will be setting an agenda for further issues. And my expectation is that social issues will be very, very high on that agenda because that's the next topic that is really on everybody's mind after climate.

Peter: So it seems that there's a real good momentum on sustainability reporting. So what things are fundamental for private business owners to have in place now in these days where they're currently reviewing all sorts of other strategies and how well should they be prepared or can they prepare themselves?

Nadja: A fundamental question, Peter, that you're raising here.

I am extremely impatient when it comes to setting reporting standards and the ISSB and the European Union, they are already moving very, very fast. If you compare this to financial reporting, it took decades, years, centuries to develop good financial reporting. I think we have months to develop really good sustainability reporting.

But, I think companies should not wait for standards to really emerge or be mandated. Let me go back to my initial comments. I think there's a lot of stakeholders that already demand a good story to be told by private businesses as well. Customers, suppliers, employees, all sorts of stakeholders.

So, it really is quite apparent and service and research have already shown that the transformation of businesses towards a more sustainable behaviour is now front and centre for stakeholders. So, step one, real practical for private business owners and leaders, is to really form a view on their sustainable business strategy.

How do they want to behave? How do they want to talk about how they are behaving? What is the sustainability story and how are they challenging themselves to contribute even more and over and above what they're doing right now in the future to that sustainable business strategy. And that means that you have to weave that sustainability consideration into your planning, into your actions.

You may have to transform your actual production, your actual business, and how you set up and run the company towards that more sustainable behaviour. And I think this is really key to avoid a mere compliance exercise, where you dump some metrics on people or climate into some disclosures, but you don't really have a good story to tell.

I think it's really about that story that you want to tell about your behaviour, about your ambition and how you are shaping the future of your company that you need to work on right now, then followed up by sound metrics and disclosures that you need to embed into your business. Another part is actually, take a look at what your peers are doing.

Maybe your public peers that are in a similar industry. That might give you a sense at what stakeholders, investors, other stakeholders might be looking for. 

Peter: That's interesting because one of the characteristics of private businesses is that they love the independence from stakeholders or shareholders.

In the public listed context this is obviously different, but nevertheless, we know that there's a gap to close the private sector, between ambition and reelections to act on ESG. So let me ask you the question, what can be the role of the regulators? Because we talked about governments and regulators: is this from your point of view, necessary, or even mandatory for governments to enhance more or to force more transparency and ESG reporting, if companies do not act by themselves?

Nadja: Peter where will transparency ultimately come from, right, it's a tricky question. I think ultimately it might be forced upon private business by all the stakeholders that I mentioned beforehand, but those stakeholders are also ultimately society, which then are the people who really form the regulators.

And the regulators will move and will listen to the demand of their people. And will force this transparent ESG reporting on private business as well. And not only rely on listed companies to make those disclosures, because again, remember, we're not after disclosures. We are after changing behaviours of business, of business acting more sustainable, and it's no longer enough also for private business to make a few donations or with the money that they earn with their companies, fund a few NGOs and contribute back to society.

The current demand goes beyond that. It goes towards what does business actively do? How does business actively change itself to create that more sustainable future that we're looking for? And regulators will move.

Peter: I remember the business leaders saying, so sometimes private businesses try to mitigate the damage that they caused by the business by being active in philanthropy. And this is obviously not what it should be.

Currently, private business is reviewing the future strategies for many different reasons. And ESG is not an objective in itself, but as you said, it requires fundamental change, including behaviour, maybe business model innovation, whatever it takes. So what should private business leaders take into consideration when reformulating their strategy from an ESG perspective, with the ultimate goal of course, to stay competitive?

Nadja: Well, it does come back to your very business. What are you producing? Where is your business and what are the issues that are related to that? 

The current draft legislation, disclosure requirements, be it from the Corporate Sustainability Reporting Directive in Europe or the ISSB and the agenda setting will give a hint. It's ultimately broad needs, just think about the three topics E, S and G, and that finds itself very nicely in your Heatmap, in the indicators that you've put under the topic of ESG, right? 

So the “E” includes climate forefront, energy consumption, climate footprint. But it also looks at other issues around the environment, which is biodiversity, pollution, most notably. 

And then on the “S”, on the social side, it's quite clear that the way you look after your workforce, the way you consider gender diversity, equity and inclusion in your company is very important to stakeholders. I know that there are quite a number of cultural differences around the globe and how you look at this, but also as a private company, you are looking for talent. You are looking for people who come work for you. And these issues do become a bit more globalised every day. So you need to cater to the expectation of your workforce as well, amongst other stakeholders. 

And then the governance issue, the Heatmap measures this with the corruption index, which speaks for itself. I will not go into governance of private business because that is quite different to publicly listed companies. But at least that very topic of the corruption index is something to really consider very actively. 

And stepping back again, private businesses are really active participants in our economies. They shape our economies. They’re more often than not the bigger part of our economies and people want to trust business. You mentioned that trust gap in your introductory words, where that trust between the people and business seems to be falling apart, but we need to rebuild that. And I think for our consumers’ sake, for us as employees, for us as business partners, we want to trust information that is being shared, but we also want to trust business to do the right thing.

Peter: Many thanks for joining me today, Nadja. I think this has been a very insightful discussion with you, and I'm pretty confident that our guests here today have found some practical and very good advice. Thanks to everyone for listening. And I hope you have found this discussion as interesting as I did.

And in the upcoming episode, we will focus on education, talent, and skills, and another very important area to dive in. Until then, stay safe and goodbye!