Expectations for disclosures on ESG issues have moved beyond the mere making of commitments.
Those who have adapted their approach to corporate reporting to articulate a holistic story of corporate purpose and commitment to a positive societal impact, backed by targets, measurable progress, and a plan to drive action, are reaping rewards. These rewards include increased capital flows, the attraction and retention of staff in a tough war for talent and, operational efficiencies to support sustainable growth. Those who are yet to adapt, face the real prospect of penalties and premiums both now and in the future when regulation catches up to this shift in expectations on corporate reporting.
Benchmarking review of ASX200 Corporate Reporting
KPMG’s eighth benchmarking review of ASX200 Corporate Reporting for the year ended 30 June 2021 includes the following:
1. Analysis and findings from our review of the ASX200 primary reports to investors, benchmarked against the Value Reporting Foundation’s International Integrated Reporting <IR> framework, which we consider good practice for reporting on sustainable enterprise value creation.
2. Interviews with executives and directors of organisations that score well against ASX200 benchmarks, to understand their approach and the business benefits achieved through adoption of the <IR> Framework. The interviews provided rich insights both into their reporting journeys and how the outcomes achieved have contributed, amongst other things, to internal strategic alignment, consistent communications, purpose-led decision making, improved stakeholder relations as well as increased access to financial capital.
3. A summary of the significant developments over recent months to develop consistent global sustainability (including ESG – Environmental, Social and Governance) standards and to address the lack of a conceptual framework for value-focused business reporting.
4. A roadmap to assist organisations to revisit and streamline their corporate reporting strategy to meet current and future requirements in a structured way. The approach outlined aims to reduce the cost of reporting, improve internal processes and practices, whilst enhancing reporting consistency, relevance, and usefulness for users.
Climate impact reporting still needs improvement
Our survey shows that many companies still have much to do in terms of understanding their climate risk and opportunity, applying the Taskforce for Climate-related Disclosures (TCFD) Recommendations and then reporting their response and likely impact in their primary report, ahead of the likely new global standard to be introduced by the International Sustainability Standards Board (ISSB) in 2022.
currently detail their climate impact with reference to the TCFD Recommendations in their primary report. Several more provide TCFD-recommended information in a supplementary report or online rather than in the annual report.
do not refer to the TCFD but discuss climate risk in their risk section.
of ASX200 companies are not reporting on climate impact, let alone adopting TCFD. This means that when the new climate standard is introduced, these companies face a considerable amount of work to prepare for it.
Those who have already adopted TCFD – and there has been a significant increase in the numbers doing so in the past 2 or 3 years – will be much better placed to cope with the new standard.
The COP26 summit in November 2021 is expected to see the launch of the International Sustainability Standards Board (ISSB), a sister body to the long-established International Accounting Standards Board (IASB). The first standard from the new board – being created to drive global consistency in sustainability reporting – is expected to focus on climate impact reporting. It is anticipated that the TCFD – regarded globally as good practice for reporting on climate impact – will likely form the basis of the standard, expected in 2022.
Another area of work for the ISSB, working with the IASB, will be to develop a conceptual framework for a new ‘connected’ corporate reporting system (e.g. potentially integrated reporting).
The first International Sustainability Reporting Standard will be a game-changer. It is driven by global investors and is being introduced to give sustainability information, including ESG, the same rigour and comparability that the capital markets expect of financial information. Market transparency requires that companies provide a more complete view of how their long-term value is created, not just short-term financial results. The interconnectivity between sustainability related information, which is now being defined to include ESG and other intangible value drivers like patents, IP, systems & processes, and financial information is now being recognised, and effective capital allocation and investment flows in global markets demands ‘investment grade’ sustainability information”.
On wider ESG reporting, which is the subject of huge interest both from regulators and investors, there is room for improvement. Only around half, 47 percent, include meaningful metrics on performance in managing ESG matters for long term value.
Organisations should embed ESG in core strategy and report on performance aligned to it. Currently many still have a separate section on sustainability, including ESG, which is not well connected to group strategy and the creation of enterprise value. Interviews with directors and executives in the report explain how adoption of the Value Reporting Foundation’s <IR> Framework not only helped them in presenting better how the organisation delivers sustainable enterprise value, but also delivered other market and business benefits.