The demand for bold action by corporates to support the transition to a more sustainable, resilient and equitable world has never been more evident. The explosion of investor and consumer interest in ESG credentials and momentum building behind voluntary and mandatory corporate reporting, particularly on climate and the ‘E’ in ESG topics, has also translated into the pressure for UK companies to disclose or risk being left behind.
The direction of travel towards more climate commitments and disclosures is clear. As we have explored in a previous blog, the FRC Thematic Review on Climate Reporting released in November 2020 signalled that companies should be reporting on both the impact of climate change on the company through frameworks such as the TCFD (Taskforce for Climate Related Financial Disclosure) and the impact of the company on the environment via clear reporting on key metrics (such as greenhouse gas emissions) and climate-related targets (such as a net zero target).
Despite the social challenges of the previous two years, we have seen an increase in climate commitments in recent reporting. In our previous research, which was focused on a sample of 100 UK private and listed annual reports from September 2020 onwards, our KPMG UK Corporate Reporting and Climate Risk teams found that 2/3 of companies in the 20/21 reporting year had committed to developing and achieving ‘net zero’ carbon emissions or other ‘science-based’ targets, up from 46% in 19/20. We anticipate that we will continue to see an acceleration in this trend this year with the momentum surrounding COP26 inspiring further climate action.
Ambitious ESG commitments also need to be matched by tangible ESG data and metrics that are reliable and credible. However, previous research of 100 UK companies found that only 1/3 companies had their climate-related metrics assured externally. Furthermore whilst 1/3 of companies linked their performance on climate-related matters to Director's Remuneration, only a handful had their climate-related metrics assured externally. This does raise concerns about the robustness of data in external reporting as well as more serious potential risks if ESG data is being relied upon by external stakeholders to make determinations about the value and resilience of companies.
These concerns may well be addressed in near future with the formation of the International Sustainability Standards Board (ISSB) created in partnership with the IFRS foundation. After these standards are adopted, we expect to see a more consistent approach to ESG data and reporting.
So, what are the current potential reasons why companies may not be seeking assurance over their ESG and climate data?
Why may this be the case?
- Decisions on ESG metric reporting have not been made so assurance cannot be sought
ESG data first and foremost should be relevant and focus on material topics. For every organisation, investors and stakeholders are focused on a variety of metrics, these will be different to each industry and individual. An organisation must therefore understand what is important to its own investors and stakeholders before being able to meaningfully prioritise which ESG metrics are the required to support internal decision making and external disclosures. Once these decisions have been made assurance can then be sought.
- Lacking confidence that ESG data is assurance ready
There may also lack of confidence in the ESG data maturity. In order to gain assurance a high level of maturity is required, this involves robust documentation of processes, methodologies, and assumptions, which if companies have not yet progressed to this stage, assurance may not be achievable.
When issuing ESG data to the public it is vital that it is accurate. ESG data has become ever more powerful as a tool for making investment decisions, so it is important that companies are wary of disclosing anything but mature and accurate data.
- Limited in-house ESG capacity
It is not only the technical knowledge of staff required to collate ESG data, it is also the resources required to take ownership and provide the necessary oversight of the project.
Companies may even feel that they need to have in-house experience of assurance engagements before engaging a third-party.
- Assuming it is covered within the financial audit
Finally, whilst climate and other ESG risks are becoming ever more material, it is commonly misconstrued that financial auditors ‘audit’ a company’s ESG metrics in the annual report. This is not the case. Financial auditors consider whether the front half is materially consistent with the back half of an annual report, however, will not conduct detailed testing over the metrics or the content of any ESG narrative – that needs to be covered by separate assurance.
What are the risks of not seeking ESG Assurance?
- Investor increasing relying on ESG data to make their decisions
Investors require information of an appropriate standard to inform their long-term decision making. Much like receiving an independent opinion over the financial statements, obtaining ESG assurance is key in increasing the reliability and confidence over ESG data. Investors are placing a greater level of focus on the ESG information contained in the front half of the annual report and separate ESG report to inform long-term decision making.
Of course, failure to provide accurate data could put the reputation of a company at risk. Whilst assurance cannot guarantee the accuracy of your ESG information, a third independent party will increase the comfort and therefore reliability of your data.
- An inaccurate picture impacting internal decision-making
It isn’t just investors who need to be informed of a company’s ESG performance. How is management expected to make informed, long term decisions without reliably accurate data? When forecasting cash flow for years to come, or planning future international strategies, if ESG data cannot be relied upon, how can these decisions be made?
- Direction of travel towards ESG Assurance
Increasingly, both companies and investors are showing their appetite towards ESG, with the market demanding greater disclosure of ESG performance. With this we have seen an uptick in assurance provided over ESG metrics, and as it becomes the norm to have assurance over your ESG disclosures, ignoring this calling could lead to a ‘lagging’ effect. As certain markets move towards mandatory ESG assurance (e.g. as required by the Corporate Sustainability Reporting Directive (CSRD)) which will impact EU countries once live, we also expect that UK assurance requirements will increase. If a company is seen to be falling behind, the public perception of those companies may be damaged.
If assurance is not sought, what are the reasons for this? Are these disclosures accurate? These are the sorts of questions stakeholders are asking. Assurance over financial information is the norm. At what point will this become the same for ESG metrics too?
How KPMG in the UK can support?
We support clients at all stages of their ESG reporting journey to improve effective ESG reporting in annual accounts and separate ESG reports, to understand the complex mandatory or voluntary reporting landscape, and to provide external assurance over ESG disclosures. We offer specialist knowledge and an understanding of the complexity of diverse regulatory frameworks. Our team works with a variety of companies, from privately owned to FTSE 100 constituents across all sectors, to provide a range of different services including:
- KPMG led workshops and gap assessments: Overview of ESG and the current reporting landscape, including common reporting frameworks; assessing reporting against existing and upcoming requirements/frameworks
- AUP private reports: A detailed Agreed Upon Procedures report of factual findings presenting results of the procedures undertaken
- Limited assurance private / public opinions: Opinion issued for publication alongside externally reported ESG KPIs to a limited level of assurance that stakeholders expect for ESG KPIs in accordance with ISAE (UK) 3000
- Reasonable assurance public opinions: Opinion issued for publication alongside externally reported ESG KPIs to a reasonable level of assurance that currently exceeds stakeholder expectations for ESG KPIs in accordance with ISAE (UK) 3000
Talk to our ESG Assurance and ESG Reporting partner: George Richards