Environmental, social, and governance (ESG) issues are increasingly important for boards as organisations face mounting pressure to demonstrate a greater commitment to long-term, sustainable value creation which incorporates the wider demands of people and the planet. Climate change, modern slavery, employee health and wellbeing, community engagement and diversity and inclusion are but a few of a company’s ESG factors coming under increasing scrutiny by shareholders, regulators, capital providers, employees, customers and the broader community.
The demand for ESG reporting by various stakeholders has been steadily growing and shows no signs of slowing down in 2022. Sustainability and transparency are increasingly associated with successful financial performance and value creation and have long-term investor appeal.
A well-executed ESG strategy can generate value in a myriad of ways, including:
- Access to new avenues or reduced cost of capital
- Improved productivity and reduced operating costs
- Access to new markets
- Improved stakeholder engagement
- Access to and retention of high-quality talent.
Notwithstanding the economic and social aspects of ESG performance, current reporting requirements and guidance are limited, but emerging. In the absence of a unified global ESG reporting standard, companies who reported on ESG often chose to draw metrics from a variety of frameworks when determining voluntary ESG disclosures.
At times this has resulted in ‘greenwashing’ where an entity might ‘cherry pick’ and disclose only information that casts its activities in a positive light. This fragmentation led to calls for the formation of a ‘standard setter’ to build on work already done, and begin issuing a single set of consistent sustainability standards that would act as a ‘global baseline’. Formed in November 2021, the International Sustainability Standards Board (ISSB) will issue IFRS Sustainability Disclosure Standards. Their work commenced with two prototype standards: One on climate and the other on general disclosure requirements.
While certain jurisdictions will develop their own sustainability reporting standards, many will partially converge with IFRS Sustainability Disclosure Standards. The ISSB is seeking to build upon what has already been done by other standard setters. It will consolidate and merge with two existing organisations:
- The Climate Disclosure Standards Board (CDSB)
- The Value Reporting Foundation (VRF) which houses the Integrated Reporting Framework and Sustainability Accounting Standards Board (SASB) standards.
While many more entities are providing ESG disclosures – both quantitatively and qualitatively - very few are fully integrated with published financial statements. With the growing focus on ESG performance it is also likely that boards will come under increasing pressure to provide adequate assurance over published ESG data. At the moment, however, very few organisations that report on ESG performance have engaged audit specialists to assist. BDO anticipates that more time, attention, and effort by a broader variety of stakeholders will demand more robust reporting on ESG performance, and correspondingly robust validation by skilled and credentialed professionals will be required for material decision making.