
Given both the cost of getting environmental, social and governance (ESG) reporting wrong and the benefits of getting it right, many financial institutions will likely need to invest more in how they communicate their approach to ESG to their stakeholders. In the past, the winners may not have been the ones who were really the leaders at ESG but rather those who could tell a more convincing story to the market. Going forward, the winners will be those who have a credible ESG story and a credible approach to ESG reporting.
The stakes are high and getting higher. Many investors now actively allocate capital based on ESG information and ratings. Two-thirds of institutional investors believe that ESG will become “industry standard” within five years. Many consumers already gravitate toward brands that address ESG issues in ways that align with their own values. Perception is reality, and the perception of your ESG efforts will depend on your reporting. Does your ESG reporting resonate with your priority stakeholders? Is the information you’re disclosing accurate and complete? Even if the answer is yes today, you may be left behind by competitors in the not too distant future. As ESG reporting continues to evolve, firms that progress faster than others—for example, by conducting real-time ESG reporting and analytics and using those insights to inform strategic decisions—will likely race ahead.
With pressure from stakeholders continuing to build, ESG is getting more attention at the C-suite level. Our March 2021 Pulse Survey shows that CFO survey respondents in financial services (FS) are more focused on ESG reporting priorities than CFOs in other industries.
Most financial institutions understand the need to devote more attention to ESG—both to differentiate themselves in the eyes of customers and other stakeholders and in response to regulatory pressure. However, many struggle to apply a structured approach to the topic, and few have met the standards of investor-grade ESG reporting.
Investor-grade reporting represents a big step up from the current level of ESG disclosure at most firms, which is largely voluntary and ad hoc. We expect ownership of ESG reporting to eventually shift to the CFO, with the CEO retaining overall responsibility for the ESG agenda. We also expect ESG reporting to become integrated with standard financial disclosures, meaning that reporting will need to meet investor-grade standards and could become part of FS companies’ compliance and controls program.
That’s why we recommend that FS firms incorporate ESG reporting into the processes already in place for financial reporting, leveraging existing competencies, controls and reporting architectures to meet investor-grade standards. In the next sections we provide an overview of challenges we see FS firms encountering and make recommendations for how they can strengthen their ESG reporting.
FS firms are often all over the map when it comes to tying the elements of ESG into consolidated reporting and to their broader strategy. They face many different frameworks and standards for enhanced ESG disclosures, including Global Reporting Initiative (GRI) standards that have advanced sustainability reporting for years and the Sustainability Accounting Standards Board (SASB) standards that provide detailed industry-specific recommendations to the varying expectations from the rating agencies. The World Economic Forum has launched an effort to move toward common “stakeholder capitalism” metrics. For climate change, consensus is building around the Task Force on Climate-related Financial Disclosure (TCFD), currently supported by more than 1,500 firms and key regulatory agencies.
The European Union (EU) has established a very ambitious set of regulations affecting the definition of sustainable activities (taxonomy) and increasing the disclosures requirements for financial institutions providing investment advice (Sustainable Finance Disclosure Regulation), both of which are applicable in full or in part in 2021. The EU has also decided to update its Non-Financial Reporting Directive (NFRD, applicable since 2014) with a targeted adoption of the revised requirements as soon as 2022.
In the United States, SASB has momentum. Recently, the SEC also requested feedback on how the agency can better facilitate climate-related disclosures. The statement contains 15 questions on potential approaches to enhance climate disclosures, including:
ESG frameworks, issues and metrics are evolving quickly, and they encompass many aspects of a firm’s operations. This makes it challenging to determine the leading way to report ESG performance with investor-grade standards. It will likely take time to get this right, so starting-and-refining will be far more useful than waiting-and-seeing. We suggest FS firms stick to a narrow set of priorities:
Whether driven by investor demand, regulation or the desire to enhance societal value, there’s now an expectation that financial institutions integrate ESG issues and sustainability into their corporate strategy, philosophy and reporting. With that expectation comes clear opportunities for firms that take a proactive approach and clear risks for those that don’t. Firms that tell a clear and credible story can not only establish themselves as leaders in the market, they stand to benefit from increased access to capital and the returns associated with that access.
Take advantage of tech-enabled solutions that can help you assess maturity, reduce potential risks, recalibrate your efforts using deeper insights and benchmark against your peers. This can help you develop required disclosures and transparency reports more quickly, gain a better understanding of your firm’s current ESG situation and more easily identify what actions you should take next.
In the longer term, as data and reporting get more regulated and standardized, objective comparisons will become easier. But by stepping into the spotlight now with a compelling ESG story, you can take strategic action in a measured way and start to build momentum over time to truly differentiate your firm.
Jeffrey Spector
Sustainability Partner, Financial Services Consulting Solutions Leader, PwC US