Investors continue to drive sustainability disclosures
Globally, investors continue to be among the key stakeholder groups driving momentum around ESG actions and reporting in the corporate world. Institutional investors are raising the stakes when it comes to assessing company performance using ESG factors. The range of ESG issues that investors look at continue to grow wide, encompassing diverse aspects such as carbon emissions, human rights record, and board diversity and at the same time the ESG reporting framework is becoming diverse and more complex. In view of growing concerns around global climate change, one specific investor focus area is around how companies are implementing recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
The TCFD recommendations provide companies with a comprehensive framework to report the impact of climate risks and opportunities systematically, making it easier for investors to analyze a company’s potential financial impact due to climate change. Despite the importance of this information to investors, recent EY research found that responsiveness to the recommendations differs significantly between countries and sectors. There were question marks around the depth of disclosures on climate risk exposure and resilience, and significant room for improvement in both coverage and quality of such disclosures made by companies.
Stakeholder capitalism – finding common ground
To cater to the stakeholder needs and to build in-depth, meaningful, decision worthy disclosures that establishes continuous dialogue between stakeholders- both internal and external, there here has been gradual and parallel evolution in the global reporting landscape of ESG. The evolving reporting landscape demands increased granularity in data, enhanced metrics for performance measurement, forecasting, equal rigour of financial and non-financial assessment, and board level demonstration of commitment towards impact, its measurement and monitoring. This evolution has the potential to bring about the systemic transition in ESG reporting enabling best practices across boards and creating long term value.
An important initiative in this direction was launched at WEF’s fourth annual Sustainable Development Impact Summit in September 2020, where a set of universal ESG metrics and disclosures were released to measure stakeholder capitalism that companies can report on regardless of their industry or region. The ‘Measuring Stakeholder Capitalism’ Framework was endorsed by the International Business Council (IBC), a community of over 120 global CEOs, and developed in collaboration with Big 4 consulting firms including EY, after an extensive consultation process.
Measuring the long-term value
It has been broadly recognized that while we live in an era of new challenges and new priorities, most businesses worldwide continue to report to financial markets using decades old accounting principles and standards. These do not adequately capture the growing proportion of value which companies create across intangible aspects of their business model which can be captured through proper Non-financial reporting practices.
As a response to this challenge, Coalition for Inclusive Capitalism launched the Embankment Project for Inclusive Capitalism (EPIC) together with EY and over 30 companies, asset managers and asset owners, with approximately USD 30 trillion of assets under management. They came together in pursuit of a single goal: to identify and create new metrics to measure and demonstrate long-term value to financial markets. EPIC’s Long-Term Value Framework provides an outline companies can adapt to identify and measure company-relevant key value drivers and to develop non-financial metrics that can help gauge value and value creation.
The Indian context – business responsibility and sustainability reporting
The growing trend of interest in non-financial performance and reporting worldwide is reflected among Indian corporates too. The most common means of ESG or sustainability reporting among companies in India is through publication of annual sustainability reports and integrated annual reports, based on the GRI Standards and the Integrated Reporting Framework respectively.
While the push for increased disclosure is mainly being driven by customers and investors or on account of a company’s own sustainability agenda, the role of regulators has so far been limited. The principal regulatory framework driving sustainability related disclosures has been the Business
Responsibility Report (BRR) driven by the markets regulator Securities and Exchange Board of India (SEBI), under which the top 1000 listed companies by market capitalization are required to annually file information against a prescribed format to the stock exchanges as part of their annual reports.
The format is based on the principles that were first outlined by the Ministry of Corporate Affairs (MCA) under the ‘National Voluntary Guidelines on Social, Environmental and Economic
Responsibilities of Business’ (NVGs) in 2011. It focusses on nine principles that largely relate to environmental, social and governance that ought to be demonstrated by all responsible corporates and excludes financial performance of companies.
What the future holds
With the evolution of reporting standards, the initiation of integration of major frameworks and the push for creation of long-term value by stakeholders, it is now clear that reporting can no longer remain the traditional backward looking, stock taking and performance measurement initiative. It must evolve into integrating forward looking metrics and opportunities assessment, business strategy evolution that indicates an organisation’s proactive approach to ESG rather than a reactive approach. Scenario analysis that is mostly applied for financial parameters will need to be applied for ESG too. The impact created and to be created and the process of valuation of ESG will gain traction. Not only the valuation of ESG risks but also the valuation of ESG opportunities in financial terms is need of the hour. An organisation’s true value creation can be ascertained only through both financial and non-financial impact evaluation.
All of these can be achieved when there is streamlined and active participation of stakeholders in areas such as − Impact investment through integration of ESG and materiality, Standardised reporting across sectors that enable comparable data, Policy regulations around reporting, Integration of national goals and SDGs in disclosures, Integrated disclosure of financial and non- financial information; creating the necessary ecosystem for the systemic shift in ESG reporting.