Environmental, Social and Governance (ESG) and Sustainability reporting is entering the big leagues, moving from a discretionary ‘extra’ to a statutory demand. In many jurisdictions, momentum behind the mandatory reporting and assurance of non-financial data (which encompasses ESG and sustainability) is already irresistible. It’s clear that companies will need to get to grips with the ‘why, what, how, who and when’ of assurance — fast.
The first thing to understand is that, while ‘ESG’ and ‘Sustainability’ are both encompassed within non-financial data, they are different — the former more investor-focused, and the latter aimed at wider stakeholder audiences. For the purposes of this article, however, they are grouped together as assurance principles remain the same.
WHY should businesses pursue non-financial data assurance?
The simple answer to the question, “why” is because many businesses will soon have to. The World Economic Forum reports that China is considering implementing potentially world-leading ESG and Sustainability reporting requirements as it works towards carbon neutrality by 2060. The European Commission (EC) is strengthening its existing Non-Financial Reporting Directive (NFRD) to encompass sustainability components. In the US, research shows that public companies are facing increasing pressure from investors to adopt ESG and Sustainability disclosure standards.
These shifts mean non-financial data is getting closer and closer to carrying the same regulatory ‘weight’ as an organization’s financial statements — and may soon demand the same rigor in terms of assurance and audit.
Beyond the regulatory drivers, however, the reporting of assured non-financial data brings tangible, bottom-line benefits. First and foremost comes trust and reputation. Robust practices here will prove attractive to a range of business stakeholders. The obvious audience is customers, but investors too are increasingly looking to ESG and Sustainability performance as a differentiator. A survey from BlackRock, one of the world’s biggest asset managers, finds that poor data or data availability is the single biggest barrier to ESG investment.
Drill down further and we find more fundamental business paybacks. Greater understanding of ESG and Sustainability performance will inevitably make businesses more efficient — able, for example, to identify and eliminate wasteful practices more easily. The biggest prizes, however, will belong to those organizations that harness their non-financial data to generate economic, social and environmental value.
WHAT will assurance demand?
So, if we start from the premise that standards around non-financial data are now getting closer to those for financial reporting, we can begin to understand the obligations this will place on businesses.
The challenge centers on the quality of the data a business collects and holds — and then properly preparing this data for regular reporting cycles.
The issue is that, for the vast majority of companies, ESG and Sustainability is either brand new, or there simply aren’t enough resources committed. It can mean that there is a lack of know-how, people, technologies, systems, processes or, critically, culture to call upon.
It’s completely uncharted territory — and a dangerous one for companies that plan to cull their data from a variety of siloed systems not designed to identify and collect it. Auditors, investors and stakeholders would have very little confidence in a business if it collected financial data in this way — so there will be a similar lack of trust around the accuracy of its non-financial reporting.
Companies will need to ensure that: 1) disclosures are consistent in requirements and format with whatever reporting standard they are reporting against; and 2) they have adequate systems, processes, and procedures in place to ensure that their data is accurate.
WHO can support delivery?
As realization dawns across the business world, actions to address ESG and Sustainability issues will be complicated by a shortage of people capable of doing so. Indeed, we are already seeing an escalating ESG talent war across many sectors. It suggests a damaging misunderstanding of the nature of non-financial data. One or two individuals (no matter how highly qualified) cannot tick the organizational ESG and Sustainability box: with assurance demanding non-financial data from across the company, it will only ever be valid if all functions and individuals are engaged and aligned.
With so much at stake, it’s little wonder that businesses will turn to specialist assurance and audit partners. Big auditing houses have spotted these opportunities early. PwC, for example, is committing an astonishing $12 billion over five years, with expansion of its ESG and Sustainability offering central to the investment. Big bets are being made because expansion will be in-depth as well as breadth. Companies will now need to increase the scope of their assurance both in terms of topics and coverage.
Partnership with native ESG and Sustainability expertise will save a lot of time, pain and cost. A leading partner brings insight, guidance and systems so that a business can make sense of, and work within, an alphabet of ESG and Sustainability frameworks, including GRI, SDG, SASB and CDP.
This partner should bring a software infrastructure that’s robust and fit for purpose — one that captures data within agreed non-financial data standards frameworks. To put it simply, splicing existing systems together and hoping to be compliant is never going to work.
Support should encompass broader data know-how, helping a business to migrate, maximize and automate — to embed meaningful compliance. Powerful analytic tools will also strengthen the business by, for example, identifying waste and unnecessary costs.
Beyond the mechanics, the best non-financial data assurance partners will ensure that disclosures, impacts and risks are reported in a clear format. It means that external auditors will be able to assure the accuracy and quality of data, while satisfying regulators, investors and other stakeholders.
WHEN should a business be ready to deliver assurance?
The complexity of non-financial data reporting means that it can’t be conjured into existence overnight. Waiting for the day when it’s mandated will carry significant costs, both reputational and financial. Pledges and promises will ring hollow unless they are matched with a pragmatic assessment of the systems and processes that are needed to achieve them.
Conversely, organizations that take full control of their non-financial data will gain competitive advantage — not least as they build trust with stakeholders and attract investors. So the answer to “when?” is “the sooner the better”.
At the heart of effective non-financial data assurance is the understanding that it’s a journey, not a destination. While the clock is ticking down — time, resource and specialized support is available to businesses of all sizes to ensure assurance when it’s needed. A combination of commitment, planning, technology and specialized know-how will help businesses and wider stakeholders achieve peace of mind.
Stefan Bojanic, Sustainability Lead, Emex