The ESG reporting landscape is dynamic: Investors, regulators and stock exchanges are increasing the pressure on companies of all sizes to report comprehensively on their ESG performance and associated risks. Some consumers are voting with their wallets and moving away from brands and companies that are lagging behind in their stewardship of nature or the communities in which they operate.
In the MENA region, governments have set the broad direction by making ‘net zero commitments’ and pledges. The region’s hosting of the 27th and 28th COP conferences, in Egypt and the UAE respectively, are an important marker of the region’s opportunity to shape the climate agenda. And regulators in the region are putting in place requirements for disclosing ESG performance for businesses by issuing guidelines.
But ESG reporting is proving to be a challenging domain for companies both in this region and globally. Findings from PwC’s latest Global Investor Survey demonstrate that investors’ focus on companies’ ESG-related commitments and actions in recent years has brought reporting further into the spotlight. Investors are using companies’ sustainability reports and setting up investing screens based on benchmarks that track everything from emissions levels to human rights records to diversity in the boardroom.
The survey also highlighted a number of deficiencies in current ESG reporting; only about a third of investors, on average, think the quality of the reporting they’re seeing is good enough. Investors cannot easily differentiate between companies on ESG-related performance and they are questioning whether much of today’s ESG reporting gives them the relevant, reliable, timely, complete and comparable information they need for effective decision-making.
The problem is more acute in the MENA region. ESG disclosures by businesses in the Middle East remain limited both in coverage and quality of reported data. According to PwC’s 2022 Middle East ESG survey, only 29% respondents believe ‘Transparency and Reporting’ to be a top priority, however over 75% of the respondents expect the ESG regulations and reporting requirements to get more stringent.
Starting from scratch?
Companies have decades of financial reporting experience using established methodologies, norms and principles as outlined in IFRS or GAAP, and they have experts fully versed in these methodologies. Their external audiences - notably investors - know how to interpret and make decisions based on these established reporting models. But ESG reporting is still in relative infancy.
There is a lack of uniform reporting standards applicable to all businesses akin to the financial reporting standards. The risk landscape differs by company and across each pillar of ESG. There are short and long-term climate risks like extreme weather events and chronic ecological challenges like water shortages. Social risk, such as public health issues, labour issues and limited community resources, are continually in flux as supply chains re-orient themselves in a fragmented global economy. Companies must identify known ESG risks like write-downs of assets or redundant technologies as well as potential risks like carbon pricing or subsidy reforms, which are subject to considerable policy uncertainty.
Yet ESG reporting can, in and by itself, be a source of risk. If it is not delivered in a rigorous and transparent manner, ESG claims can be criticised as greenwashing. They might be presented in formats that are not useful or practical for external audiences to make informed assessments. Companies therefore face a difficult dilemma of having to increase their level of ESG reporting without clearly agreed and universal standards for doing so. To bring ESG reporting to the same high standards of transparency and clarity at par with those in financial reporting requires new skills, processes and controls.
Tangible actions for your organisation to consider:
- 1. Raise ESG risk reporting to the same standards and rigour as financial reports.
- 2. Develop a credible implementation plan.
- 3. Inaction is a risk.
1. Raise ESG risk reporting to the same standards and rigour as financial reports.
ESG reports need to be digestible, succinct, and articulate. As a first step, companies should baseline the existing ecosystem and benchmark against competitors, regionally or globally, or companies they aspire to emulate. Companies should then move into ‘materiality’ with internal and external stakeholder engagement to identify priority ESG risk areas. They then need to put in place the right teams and institutional structures. The skills needed for external reporting are different and more sophisticated than internal reports and require a knowledge of the relevant reporting regulations and their evolving trends. Companies also need to institute governance oversight via audit committees or ESG committees or Boards before reporting is released, to achieve a similar level of scrutiny as financial reporting. They must continually keep abreast of trends in reporting and standards not just regarding the environment but also areas like labour conditions, adhering to standards like the Global Reporting Initiative (GRI) and the Task Force on Climate-Related Financial Disclosures (TCFD). There is also a need for an appropriate audit trail for metrics and information reported that can be subject to an external audit and face the necessary scrutiny.
2. Develop a credible implementation plan.
ESG reporting is an outward display of everything a company is doing or plans to do, and it requires the right data to quantify plans and avoid mis-statement. But that is only the first step. Companies need to have the right tools, technology, people and data to deliver accurate, transparent external reporting and consider the implementation involved in delivering against it. They must have a plan in place for implementing their ESG strategy and move into the transformation phase.
3. Inaction is a risk.
Despite the reputational risks of poor or selective reporting, the risk of not acting is significant. Companies must respond to the demands of governments, customers, investors, and societal stakeholders. Failing to do so will translate into a loss of market share and future growth and value.
Those with exemplary ESG performance are already seeing benefits to their business and consumer engagement. While companies are understandably cautious about disclosing information they cannot quantify and may prefer to avoid the risk of greenwashing accusations by limiting themselves to the most minimal reporting for compliance, the key is to get the reporting process, controls and skills right from the beginning to allow them to communicate their ESG narrative in a robust, credible way.
