There is increasing board accountability for ESG, with an expectation for transparency and authenticity, says Deloitte’s Matt Reynolds
A global transition is under way to create a new sustainable norm where people, the planet and economic prosperity are protected for the future.
The transition was triggered in 2015/16, when the UN adopted its 17 sustainable development goals, the Paris Agreement was signed (which 192 countries plus the European Union have now joined) and the Financial Stability Board created the Task Force for Climate Related Financial Disclosures.
Since then, numerous additional ESG frameworks have come to the fore in quick succession to act as the bedrock of corporate ESG reporting.
The Channel Islands are taking a progressive stance. Guernsey is supporting green funds and amended its code of corporate governance to apply pressure on boards to duly consider climate change.
And Jersey is advancing its carbon-neutral roadmap and strategy to become a world-class sustainable finance centre.
A time for transformation
Operationally, organisations should transform to:
• Maintain strategic advantage by driving enterprise value and protecting long-term viability
• Meet ESG regulation and deliver transparency to investors
• Address societal concerns and support a sustainable economy for the future.
Respective transformation is of strategic importance, with boards becoming ever more accountable for consideration and action around these areas.
This has been amplified and accelerated due to a shift in how businesses are being perceived by customers. ESG authenticity now goes hand-in-hand with client trust, confidence and shareholder value.
This places wider responsibility on boards to act as stewards supporting a better future far beyond their organisation, while clearly demonstrating this wider commitment.
Transparency driving trust
Complexities arise, especially in financial services organisations, where the value chain of underlying investments is being called into question. A greater level of transparency is expected to demonstrate that investments hold genuine green credentials.
Net zero claims are being similarly challenged, with companies being encouraged to disclose more granular transition plans. Adding to these complexities, no one universal ESG taxonomy or regulatory standard currently exists to deliver a unified benchmark.
Wider standards are emerging – for example, the International Sustainability Standards Board (ISSB) under the IFRS Foundation, the European Commission’s Corporate Sustainability Reporting Directive (CSRD) and the merged International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB) under the Value Reporting Foundation.
The direction of travel is clear. It is very likely regulatory reporting will become mandatory for organisations.
Audits will include specific ESG attributes and respective assurance will be needed to substantiate that organisations are fully aware of ESG risks, that data included in metrics and targets is appropriately collated and reported, and that strategies are in place to positively contribute to climate, biodiversity, people, governance and a sustainable economy.
Importance of data
Investors are increasingly interested in data that shows organisations have factored in risks related to ESG, and that longer term management of these risks is consistent and not at odds with financial performance.
Data is being increasingly linked to organisational performance. Advancement of ESG data availability, including those that are scientifically based, reinforces the value of data as a business-critical asset. This data will deliver regulatory and investor confidence across the value chain.
With organisations likely to be subject to assurance requirements in future, attention is being given to internal controls for ESG-related data, ensuring that organisations can evaluate their systems and processes for managing this information through a risk-and-control lens.
Emerging role for assurance
The audit committee has a key role in the consideration of reporting on internal controls and risk management, as part of ensuring that emerging mandatory disclosures represent a fair, balanced and understandable assessment of progress.
The committee also highlights if the impact of climate change has been adequately reflected in the financial statements.
Beyond this, the audit committee’s considerations may extend to a gap analysis against ESG regulations, materiality of climate risks and a determination whether ESG assurance is robust and independent.
As and when ESG assurance becomes mandatory, there will be a recalibration on ESG benchmarking, with organisations that have established truly robust ESG strategies, governance, risk management, metrics and targets being positively valued by society and shareholders.
Starting your sustainable journey
The extensive nature of ESG cannot be underestimated. It encapsulates employment standards, diversity and equal opportunities, social inclusion, board composition, business ethics, executive remuneration, regulatory compliance, resource use, decarbonisation and value chain transparency.
This requires wide-scale organisational transformation, from technological enablement, data and analytics improvements, to process and operating model optimisation and heightened reporting and compliance.
FIND OUT MORE
Deloitte helps clients find unique solutions to lead the way in a new sustainable economy, supported by our global WorldClimate team, who also advise Earthshot Prize winners on how to develop and scale their solutions.
Contact Senior Manager Matt Reynolds: mrreynolds@deloitte.co.uk
• This advertising feature was first published in the ESG Edition of Businesslife magazine in April 2022