- CFOs fall short of meeting investor needs for reporting on environmental, social and governance (ESG) performance and need to quickly act to show how they will derive value for their companies from sustainable business practices, EY said.
- While 51% of investors believe that company reports fail to detail the long-term benefits from advancing sustainability, just 38% of CFOs share this view, EY said in a survey. Half of investors believe company ESG reports lack substance, compared with only 38% of CFOs, EY said, highlighting “a gap between how useful companies believe their ESG reporting to be and the views of investors who use it in their decision-making.”
- “There is increased pressure on corporates to improve their ESG reporting — from equity investors, insurers, lenders, bondholders and asset managers, as well as customers who all want more detail on ESG factors to assess the full impact of their decisions,” EY said. “Finance leaders should move quickly to meet stakeholders’ expectations and articulate a unique narrative of how they create long-term value.”
The stakes of disclosure are rising for CFOs at publicly-traded companies as both institutional and retail investment surges into assets tied to ESG principles.
Global ESG investment soared 55% to $35.3 trillion last year from $22.8 trillion in 2016, according to the Global Sustainable Investment Alliance. The total will probably exceed $50 trillion by 2025, making up more than one third of the projected $140.5 trillion in global assets under management, according to Bloomberg.
CFOs and investors eager to promote ESG best practices must currently choose from more than 15 competing sustainability reporting frameworks that vary in detail and scope.
“ESG reporting is characterized by an ‘alphabet soup’ of standards, with companies favoring a particular model based on its relevance to their sector and business model,” EY said.
The International Accounting Standards Board, the supervisor for global accounting rules, announced last month the creation of a board to draw up disclosure standards for ESG practices, including carbon emissions.
The launch of the International Sustainability Standards Board at the COP26 climate conference in Glasgow was in response to increasing pressure from investors, lawmakers and other stakeholders for consistent, standardized rules for ESG disclosure.
The ISSB plans to gather opinions from shareholders, companies and other stakeholders and release an initial group of standards during the second half of next year, initially focusing on climate-related standards.
Securities and Exchange Commission Chair Gary Gensler has said agency staff will consider the current array of global standards while crafting by early 2022 a proposal for mandatory climate risk disclosures for consideration by SEC commissioners.
Companies may need to report on metrics such as greenhouse gas emissions, financial impacts of climate change and progress towards climate-related goals, Gensler said in July, adding that he aims to ensure investor access to “consistent, comparable, and decision-useful disclosures.”
CFOs need to bolster the credibility of their ESG reports to investors, EY said. “Until now, investors have used their own externally sourced ESG data because they didn’t always have complete trust in all of the nonfinancial disclosures that were provided.”
At the same time, CFOs often have trouble identifying the information investors most want, EY said, describing its survey of more than 1,000 CFOs and financial controllers worldwide. When crafting ESG disclosures, financial executives said “their number one barrier was ‘getting clarity from investors on what they want from ESG reporting.’”
Still, CFOs should not shrink from the challenge of weaving sustainability into business strategy, risk management and reporting, EY said. “Finance leaders should take the lead in advancing the ESG agenda among their C-suite peers.”
“This important strategic role for finance leaders can help provide confidence that ESG underpins areas including capital allocation, supply chain considerations and meeting different investors’ preferences,” EY said.