Delivering value beyond compliance with ESG reporting

On 31 July 2023, the European Union (EU) adopted the Corporate Sustainability Reporting Directive (CSRD), requiring EU and non-EU companies with activities in the EU to file annual sustainability reports alongside their financial statements. These reports must be prepared in line with European Sustainability Reporting Standards (ESRS).

That ESG reporting has moved from a voluntary exercise to mandatory should not come as a surprise. Stephen Adams, director in the Gartner Finance practice, says: “ESG reporting is more widely watched than many CFOs realise. Equity investors and asset managers are the visible tips of the iceberg, but beneath the surface, 91% of banks monitor ESG, as well as 24% of global credit rating agencies, 71% of fixed-income investors and over 90% of insurers. CFOs who are not conveying an ESG story to these stakeholders are missing out.”

Adapting to an evolving ESG regulatory landscape

Goh Yin Shian, a member of the ISCA Sustainability and Climate Change Committee and group finance director with Goodpack, says in Asia ESG regulations continue to evolve. He adds that the accelerating implementation is fuelled not only by stakeholder expectations to make a positive impact on the environment but also through financing mechanisms to drive change such as sustainable investing and financing.

For example, in 2024 SGX-listed companies and large non-listed companies may be subject to Singapore climate-related disclosure requirements in line with the International Sustainability Standards Board (ISSB) standards.

Goh says organisations will have to quickly adapt to the above landscape for fear of being “late to the game.” He opines that ESG topics have become one of the first agendas in Board/leadership meetings within organisations due to the evolving regulatory landscape.

“Depending on an organisation’s environmental/social footprint, an ESG team or dedicated senior member is generally appointed to ensure that the organisation’s enterprise risk management adapts to the regulatory landscape,” he continues.

Goh says the effects of the regulatory landscape go beyond the organisations that are subject to regulations. “For example, if organisations do not have a strong shift to operate in a sustainable way, they may not be considered by their current vendors/customers as business partners. As such, even smaller companies which are not yet subject to regulations need to begin adopting sustainable practices or risk losing out,” he continues.

Ensuring accuracy and transparency of ESG reporting

Bedford Consulting lists multiple reporting frameworks, complex regulations, understanding the impact of ESG initiatives, defining and quantifying ESG risks and complex data management come together to make ESG reporting a nightmare for all involved.

“Accuracy and transparency of ESG reporting are paramount as the backlash of greenwashing or even the perception of an organisation suspected of doing such will have a negative impact on an organisation’s reputation and be costly to recover."

Goh Yin Shian

He opines that this is even more so as there is a growing shift for the remuneration of an organisation’s top executives to be linked to reported ESG targets.

Goh suggests that to ensure ESG initiatives don’t fail, organisations should:

Adopt a top-down management approach: Ensuring companywide acknowledgement from the board to the factory floor and working towards a common goal as opposed to having an “ESG team” pull together the pieces to merely fulfil reporting obligations, while everyone continues to work on their respective goals without incorporating sustainability factors.

Adopt established standards and frameworks: An organisation’s data will be discounted if it does not follow a standard to ensure consistency. Hence, it is crucial to adopt established standards and frameworks such as the International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards issued by the International Sustainability Standards Board (ISSB), the Greenhouse Gas Protocol and ISO 14064. This will improve consistency and comparability amongst organisations.

Seek Independent Assurance: Having a third party perform sustainability assurance service as per recommendations by the Sustainability Reporting Advisory Committee (SRAC) would provide stakeholders with confidence in the accuracy of ESG indicators and help reduce the risk of greenwashing.

Areas to improve upon

Asked what steps are lacking (if any) as regards to ESG reporting, Goh believes that much work needs to be done due in part to:

Lack of standardisation of reporting standards across the world: There are varying levels of maturity within Asia on ESG with regard to the classification of green activities, carbon pricing schemes and Corporate ESG disclosures. The West is also moving at a different trajectory thus organisations who are obliged to perform ESG reporting in Asia Pacific but have a Europe/Americas headquarters may result in a lack of uniformity.

Data inconsistencies: Organisations may face difficulties in collecting standardised data across their diverse operations and regions. This is even more so if an organisation has subsidiaries operating in diverse sectors/industries. In these cases, data may be incomparable or subject to interpretation.

For example, the data for achieving environmental targets in one business vertical with a bigger environmental footprint (manufacturing: water/waste discharge) will have lower significance in another business vertical (service business) with a smaller environmental footprint but such data needs to be grossed up to represent the whole organisation.

Capacity and expertise: Many organisations may lack the internal capacity and industry know-how needed to effectively implement ESG targets and structure ESG reporting practices. Building the skills and resources within the organisation to evaluate, analyse, and report on ESG data remains a big challenge in ESG reporting, particularly for smaller organisations where economic survival is seen as a higher priority.

He notes that it is with these in mind that ISCA, with the support of its Sustainability and Climate Change Committee, seeks to help support organisations in their sustainability journey. “This is done through a multi-pronged approach including the issuance of guidance and publications and outreach engagements to raise awareness, promote action and share good practices,” he elaborates.

To help plug the skills gap in sustainability reporting, ISCA has launched the ISCA Sustainability Professional Certification programme. The programme equips participants with the essential skills needed to spearhead sustainability initiatives for their organisations to mitigate risks and capture emerging opportunities.

Bringing climate issues into financial reporting

Asked how organisations are integrating climate-related risks and opportunities into their financial reporting, Goh posits that organisations can do so via:

TCFD reporting: The recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) provide a framework for organisations to disclose climate-related risks and opportunities in their financial filings.

Many organisations are aligning their reporting with TCFD recommendations, which include disclosing information on governance, strategy, risk management, and metrics related to climate change.

Scenario analysis: Organisations as part of the future appraisal of new ventures and projects will incorporate scenario analysis to assess the potential impacts of different climate change scenarios on their operations, supply chains, and markets.

This involves modelling various climate-related scenarios, such as temperature increases, regulatory changes, and shifts in consumer preferences, to understand their financial implications. This can be part of an organisation’s enterprise risk management practice incorporating every variable to decide how to move forward with any venture or project.

Board governance: Boards of directors today have begun taking responsibility for overseeing climate-related risks and opportunities. As mentioned earlier, ESG topics are gradually becoming the first agenda in Board meetings within organisations. 

By integrating climate considerations into board meetings both under the relevant subcommittees associated with oversight and governance, organisations demonstrate their commitment to addressing climate change as a strategic business process. This would ensure all opportunities are carefully considered for climate-related risk before embarking on them.

Goh believes that with this information disclosed, all stakeholders could make a start to appropriately assess and price climate-related risks and opportunities and for organisations to have a roadmap to improve performance and for all organisations to transition to a low-carbon economy.

He is confident that many organisations are aligning their reporting with TCFD recommendations, which include disclosing information on governance, strategy, risk management, and metrics related to climate change.

In the SGX-CGS NUS Sustainability Reporting Review 2023, it was found that 73% of SGX-listed issuers that released a sustainability report had provided at least some climate-related disclosures using the TCFD Recommendations.

He acknowledged that while the TCFD was disbanded in October 2023, the ISSB has taken over the monitoring of the progress of companies’ climate-related disclosures from the TCFD. For example, he notes that the ISSB’s IFRS S1 and S2, which were issued in June 2023, fully incorporate the TCFD recommendations.

“The ISSB has received tremendous support throughout its consultations and currently, there is a growing number of jurisdictions which are consulting on or considering the adoption of the ISSB’s standards,” concludes Goh.