How Irish organisations can bridge the ESG reporting trust gap

Corporate reporting needs to be aligned to investors and stakeholders’ expectations on ESG disclosures for long-term value creation.

The EY Global Corporate Reporting and Institutional Investor Survey¹ has revealed a significant and concerning disconnect between the expectations and goals of organisations on the one hand and their investors on the other when it comes to corporate and sustainability reporting. This disconnect could potentially undermine the trust that is necessary between an organisation and its stakeholders, including customers, employees, communities, and investors.

The research found that there is a potential disconnect between investors and corporates on the trade-off between short-term earnings and long-term value creation. Investors are much more likely to favour decisions that lead to sustainable, long-term value creation even at the expense of short-term earnings performance, but finance leaders are much less inclined to agree. Of the investors surveyed, 78% think organisations should make this trade-off, but only 55% of finance leaders are willing to take this long-term stance.

In Ireland, we continue to see business that are challenged by rising inflation and energy prices. So, finance leaders have to keep the lights on while at the same time embracing a sustainability agenda, thereby creating a sustainable and an economically resilient business.

The disconnect could create problems in relation to sustainability performance and corporate reporting. For example, will an organisation’s disclosures reflect investors’ long-term priorities if they are not shared by its finance leaders? Will the reports offer a clear narrative on the organisation’s strategy for delivering long-term sustainable value?

This could lead investors to believe that organisations are unwilling to make the investment commitments required to move from ESG targets and promises to concrete achievements and progress.

Where is the disconnect?

There is a degree of pushback from corporates with 53% of the large organisations surveyed (those with revenues of more than US$10b a year) saying that they face short-term earnings pressure from investors, which impedes their longer-term investments in sustainability.

On the other hand, 80% of the investors surveyed said that too many organisations fail to properly articulate the rationale for long-term investments in sustainability, making it difficult for them to evaluate those investments.

In other words, lack of clarity in reporting means that investors find it difficult to support sustainable investment strategies. This is particularly important as 99% of investors surveyed are utilising organisations’ ESG disclosures as a part of their investment decision-making, including 74% who use a rigorous and structured approach. This is a significant increase on 2018 when the 2018 EY Global Institutional Investor Survey found that only 32% of investors were using a rigorous approach.

However, the strong feeling among investors is that they do not get the information and data-driven insights they require to inform their investment decision-making and to evaluate an organisation’s growth and risk profile. Of the investors surveyed, 73% said organisations have largely failed to create more enhanced reporting, encompassing both financial and ESG disclosures, which is critical in investment decision-making.

In Ireland, consumer demands have outpaced regulation which has created this information gap. For the most part Irish companies have to date disclosed ESG information on a voluntary basis with only financial institutions and certain listed companies required to disclose information. This will change though with the introduction of the Corporate Sustainability Reporting Directive (CSRD), which will introduce reporting requirements for many from 2024 onwards.

The EY 2022 Global Climate Risk Barometer, a comprehensive analysis of disclosures made by more than 1,500 organisations across 47 countries, found that while more businesses are reporting on climate risk, they are not providing meaningful commentary about the challenges they face. For example, more than 50% of the organisations surveyed are still either not conducting scenario analysis or choosing not to disclose the results.

Regardless of the cause, the result is the same – a potential trust gap between corporates and investors. Indeed, the evidence suggests that it already exists with 76% of investors saying that organisations are highly selective in what information they provide to investors, and this raises concerns about greenwashing. In addition, 88% believe that businesses will only provide complete decision useful ESG disclosures when forced to by regulatory requirement.

Key steps to build trust

There are ways to close that trust gap, however.

Alignment with investor expectations requires organisations to provide more robust insights into the important opportunities and risks faced, including transition risk and physical climate risk. In addition, organisations should meet investor requirements for robust governance and board oversight around sustainability and the achievement of ESG goals. They should also respond to investors’ calls for more consistent, comparable, and reliable ESG disclosures by adopting global reporting standards and subjecting their sustainability reporting to independent assurance scrutiny.

The research shows that only a minority of finance leaders feel that they have a mature capability when it comes to sustainability reporting. To address this, there is a need to transform the finance function so that it is properly resourced to undertake the high-quality sustainability reporting required by investors.

Here are some of the steps that can be taken:

These measures will help organisations better align their ESG reporting to the evolving needs of investors, thereby bridging the trust gap and providing them with the information they require to make investment decisions.