The crippling effect of the Covid-19 pandemic on global markets has further highlighted the importance of socially responsible investments to ensure a sustainable future for the next generation. As a result, investors, regulators, and other stakeholders prioritize environmental, social and governance (ESG) risk as a critical consideration for investment and regulatory decisions.
Identifying appropriate ESG indicators, accurate quantification, and performance disclosure against these indicators has become a key focus. Forward-thinking companies proactively consider ESG risks when developing their strategic aims and objectives. These organizations now include detailed ESG disclosures in external reports to inform the narrative. It also prevents analysts and other stakeholders from forming inaccurate conclusions based on unreliable information from alternative sources.
The external audit profession usually provides comfort to stakeholders by offering opinions on the reliability of financial information. Over the years, robust controls and governance have been developed by finance departments to ensure integrity in financial reporting.
ESG non-financial data is, however, sometimes outside the remit of the traditional finance function. Finance therefore plays a critical role in ensuring the integrity of non-financial information. External auditors are well-positioned to help stakeholders by endorsing the integrity of non-financial disclosures and ensuring they align with financial information in external reporting to stakeholders.
Ample guidance is available to inform appropriate ESG disclosures, and we have seen renewed momentum by both regulators and professional bodies to enhance the framework available. The recently released reports by the Basel Committee are of particular interest beyond the banking sector. All companies that rely on bank funding could be affected, as they could be expected to include ESG disclosures in their financial statements as their bankers evaluate ESG risk profiles, together with traditional credit risks when assessing exposure.
A recent KPMG survey revealed that a considerable number of jurisdictions included sustainability reporting because it was required by the government, stock exchange or both. The survey showed the UAE’s rate of sustainability reporting has improved significantly from 44% in 2017 to 51% in 2020 but remains lower than the global average. Progress can be attributed to the formal commitment from the Abu Dhabi Stock Exchange (ADX) and Dubai Financial Market (DFM) to ESG disclosures, with both institutions developing and releasing voluntary disclosure guidance.
The UAE is already recognized as a major regional and global financial and trade hub. The nation is well-positioned to benefit as countries and multi-nationals have a post-pandemic strategy that involves a strong ESG focus. Local companies that appreciate the importance of comprehensive ESG disclosures and are proactive in getting reliable information assured by the external auditors will be among the best positioned to benefit from this shift in global sentiment.