Circle the Wagons: Create Assurance Around ESG Data
We’ve blogged before about the importance of oversight and disclosure controls related to sustainability disclosures. Just last week, John blogged about CII’s statement calling for use of standard reporting metrics, which also said over time, companies should obtain external assurance of sustainability disclosures. This follows a 2019 McKinsey survey that found 97% of investors surveyed said sustainability reports should be audited and 67% said those audits should be as rigorous as financial audits. A recent EY survey of nearly 300 institutional investors reiterates the importance of the disclosures coupled with the credibility of the information. According to EY’s report, investors are stepping up their game in terms of assessing company performance using non-financial factors. High-level data points from EY’s report include:
Overall, 98% of investors surveyed evaluate non-financial performance based on corporate disclosures, with 72% saying they conduct a structured, methodical evaluation. This is a major leap forward from the 32% who said they used a structured approach in 2018.
Investors are also building their understanding of the ESG reporting universe, factoring in disclosures made as part of the Task Force on Climate-related Financial Disclosures (TCFD) framework. In fact, this research found strong evidence that investors see the TCFD framework as a valuable approach for wider non-financial disclosures, beyond climate-related information.
The research found investors have a significant appetite for an independent lens on ESG performance. For example, 75% said they would find value in assurance of the robustness of an organization’s planning for climate risks.
The report offers three suggestions to help companies meet investor expectations:
(1) Build a stronger connection between non-financial and financial performance. Investors can focus on building more credible and nuanced approaches to understanding what influences long-term value for certain sectors and companies, while companies themselves can focus more on their materiality — reporting on what environmental, social and economic factors are most relevant to their stakeholders and could impact their ability to create value over the longer term.
(2) Build a more robust approach to analyzing the risks and opportunities from climate change and the transition to a decarbonized future, and communicate this more comprehensively through TCFD reporting. Critical actions range from understanding the resilience of business strategies and assets under a range of possible climate scenarios, to assessing avenues for capitalizing on the economic opportunities of a decarbonized future – including attracting and accessing capital.
(3) Instill discipline into non-financial reporting processes and controls to build confidence and trust. Establishing effective governance practices and seeking independent assurance of non-financial processes, controls and data outputs can help build trust and transparency with investors. This is an area where CFOs and their finance teams — which have extensive experience in establishing processes, controls and assurance of financial information — can bring their best practices and experience to bear. The input of CROs and risk teams can also be valuable, as can treasury function input when green finance is involved.
-Lynn Jokela, TheCorporateCounsel.net October 7, 2020
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