ESG Investing Conference

ESG Investing

Impact Investing Forum

https://impactinvestingconferences.com/

London. Nov 18-19. (Virtual)

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Impact Investing Conference

5 steps to successful ESG reporting – FM FM | Financial Management5 steps to successful ESG reporting – FM FM | Financial Management5 steps to successful ESG reporting – FM FM | Financial Management

Impact Investing Conference

Company leaders face difficult decisions as investors demand more information and regulatory requirements. It can be difficult to decide which metrics to share, which to disclose, and which reporting framework to use. “You need to identify your metrics, goals and targets, decide on which standards you will follow, and/or if your own KPIs will be created,” Maura Holge, CPA, an audit partner at KPMG US, who leads the firm’s ESG and sustainability assurance practices, stated in a recent webcast. There are no agreed-upon standards for ESG reporting, which results in inconsistent, unreliable and incomparable reports with other organisations. Companies can still disclose information on sustainability matters, regardless of whether it’s called ESG, corporate Social Responsibility (CSR) or another label. The Governance & Accountability Institute found that 90% of the 500 companies published sustainability or corporate responsibility reports last year. Investor demand is one factor driving the growth of ESG reporting. Another factor is the increase in regulation, such as EU’s Sustainable Finance Disclosure Regulation. The Securities and Exchange Commission in the USA is expected to present its proposal for disclosures about climate change and human capital by year’s end. Companies that don’t want their business to be left behind when mandatory ESG reporting becomes common have begun to disclose issues that are relevant to them. Michael Bueker (senior vice-president of finance, Middle East, Siemens Energy) shared his experience in a podcast episode. He said that the ESG reporting process takes many years and that the company is still working to improve it. It’s a transformation. He said that he spent a lot of effort and time training people to give them a clear perspective so that they can see that this is a positive path for everyone. What are the steps in this journey? Hodge described five stages in an ESG reporting journey: establish, assess and design, implementation, sustain and assure. 1. Establishing A company’s support of ESG issues is not based on a report. It comes from its strategy. The reporting of the strategy is critical to communicate how the strategy will be implemented. Hodge stated that companies usually start with a stakeholder assessment to determine the materiality of their stakeholders. She explained that the company will engage with its stakeholders to determine what is most important to them, and how these priorities relate to its business. The company will then need to establish its metrics, goals, targets, and reporting standards. She said that companies often create their own key performance indicators to avoid having to conform with the reporting standards. “I think of them almost as non-GAAP measures, similar in concept to financial statements. She explained that ESG standards and frameworks can be helpful in comparing companies, but that it is perfectly acceptable to measure internal performance using a different set. The next step is to consider how and where this information will go. “Will it all go in SEC filings? Will you have a standalone corporate responsibility or sustainability report or will you have a separate [Sustainability accounting Standards Board] or [Task Force on Climate Related Financial Disclosures] report?” Hodge stated. “I think companies are struggling with all of these, and it really [about] assessing each one of them.” 2. Assess Companies should assess their current processes and procedures in order to determine if they have controls in place. The process may be driven by the end destination of the information. Companies may need to follow a more stringent process if the data is being used for corporate filings, such as the AR01 filing in the UK or the 10K filing in the US. Hodge explained that this is different from information that will be going on the corporate website. This information is tied to brand and reputation and requires a lower degree of rigour, as long as there are evidence to support the claims. She said, “During this phase it’s also really important that you think about technology.” “How technology can be used to improve efficiency and effectiveness, and create high-quality data throughout your process.” 3. Design and implementation This phase focuses on deciding how and who will implement controls. Hodge stated that it also involves figuring out how ESG issues can be connected with financial reporting. Companies should identify areas where they may need to have different policies and procedures. If a company decides to achieve gender parity as one of its ESG goals and has chosen the metrics, it will need ensure that the data collection process does not leave any gaps. Hodge explained that often, the person collecting data sends an email asking for information. Sometimes, the report contains incomplete data due to confidentiality issues. Companies may realize that it is possible to improve the efficiency of their HR systems by adjusting them to collect additional information. 4. Sustain Once a company starts collecting ESG data, it must ensure continuous monitoring. This could include testing controls throughout the year and ensuring that there is sufficient evidence to support certifications or audit trails. Hodge stated that clients are in discussions about adding a certification process where data owners and collectors certify up to a steering group or to a governance lead to show that they have followed the procedures. 5. Assure that “Ultimately, once you have all your data in order, and you know that there is an audit trail, then you can start to seek assurance.” Her work with companies includes assurance over data, including greenhouse gas emissions and full sustainability reports. “We believe that this assurance is inevitable. Hodge stated that the European Union has included it in their proposed rules. “We’re waiting to hear how the SEC will see it.” “But, regardless of whether you’re using it for internal audit purposes, or for external audit purposes, you must be prepared and have the supporting documentation. She said that companies are ensuring their ESG data to comply with increasing regulations. This is in addition to lowering borrowing costs and highlighting ESG achievements to investors. Hodge said that companies should expect their ESG journeys will take at least two to three years due to future changes in regulations and investor expectations. She said that the ESG reporting process is very iterative, but that you can’t wait. “It’s better if we have a process in place that can be modified than starting from zero until we know how this will play out.” — Alexis See Tho (Alexis.SeeTho@aicpa-cima.com) is an FM magazine associate editor. Resource A look at the evolution of sustainability standards and frameworks.

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ESG Investing Conference