Corporate directors see ESG reporting as necessity

Accounting

Corporate board members may finally be ready to embrace environmental, social and governance reporting by their finance teams.

Nearly two-thirds (64%) now say that ESG is linked to their company’s strategy, compared to just 49% in 2020, according to PricewaterhouseCoopers’ 2021 Annual Corporate Directors Survey, which PwC released Tuesday.

Feeling increasing pressure from shareholders to be more transparent about ESG reporting, directors worry they lack the understanding they need to make enough of an impact on ESG issues like climate change. But growing demand from regulators to report using accepted metrics may push boards to think beyond their voluntary disclosure policies, according to the report. The survey also found that only 25% of the 815 directors polled say their boards have a strong grasp of ESG risks, while only 28% of directors say their board has a strong understanding of their company’s ESG and sustainability messaging. In addition, fewer than one out of five directors (18%) indicated they’re in favor of mandatory ESG reporting or disclosure requirements. Two-thirds (67%) of the respondents prefer the current, voluntary approach.

“ESG is definitely the story in the boardroom,” said PwC Governance Insights Center leader Maria Moats. “There is no question that directors are focused on ESG. Over two-thirds of the directors now tell us that their company has embedded ESG risks and opportunities into their strategy. Boards oversee strategy, so there’s no question that there’s a lot of interest. They may not be at the right level of their own personal understanding of the company’s ESG strategies, risks and opportunities to really drive impactful change here as they oversee management and hold them accountable. They’re talking about ESG, but they’re not quite ready to answer all the right questions, although they want to. They know the SEC might mandate certain things, and they don’t love mandated disclosures. They prefer voluntary, so these are interesting times that we are living in, but there’s no question that the directors understand that stakeholders, institutional investors, customers and employees are looking to the companies to disclose more and be more transparent about what they’re doing around ESG.”

The Jaenschwalde lignite power plant operated by Vattenfall AB in Peitz, Germany.

Krisztian Bocsi/Bloomberg

Various efforts are underway to standardize the reporting, with different ESG standard-setters like the Sustainability Accounting Standards Board and the International Integrated Reporting Council (which recently merged to form the Value Reporting Foundation), as well as the Global Reporting Initiative, the Climate Disclosure Standards Board and the Carbon Disclosure Project, agreeing to harmonize and align their standards and frameworks more closely. Meanwhile, the International Financial Reporting Standards Foundation is in the process of setting up an International Sustainability Standards Board that it would oversee alongside the International Accounting Standards Board. Earlier this year, the Securities and Exchange Commission solicited comments on requiring climate change disclosures from public companies, while the European Union issued guidelines in 2019 for corporate disclosure of climate-related information.

“There’s a stakeholder need for transparency and more disclosure around ESG,” said Moats. “What would be really helpful to the marketplace and to issuers in particular is consistency and comparability of information. Giving the marketplace frameworks and standards to help with compatibility and consistency, likely by industry, would help companies better tell their ESG story. There is definitely a need for what the regulators are doing.”

Boards have also come under pressure from activist shareholders for more action to combat the accelerating pace of climate change.

“If you look at any company’s public documents like the proxy and you see who owns their stock, there’s a large percentage of ownership by institutional investors,” said Moats. “The institutional investors are asking questions, not only just shareholder proposals that are coming to the company, but they’re engaging with them during the year and asking questions around how are you really looking at ESG and how will you measure progress around ESG goals? Take climate and goals around net zero commitments. Over what period of time? How will you measure progress, whatever your ESG goal is, or on diversity and inclusion goals? They’re getting the questions from the investor community, and they’re also getting them from customers.”

Other board member surveys are showing similar concerns. BDO USA’s recently released 2021 Fall Board Pulse Survey found that nearly three-quarters of directors (73%) are focused on keeping up with evolving regulatory and reporting guidance for ESG in the near term. The most important priorities from shareholder meetings in the 2021 proxy season include accountability for ESG/sustainability (13%) and DE&I efforts (13%). To hold themselves accountable, more than one-third of boards (35%) plan to create an ESG-specific committee.

Other firms are also getting involved with ESG efforts. KPMG released its Net Zero Readiness Index report on Thursday, which compares the progress of 32 countries in reducing the greenhouse gas emissions that cause climate change and assesses their preparedness and ability to achieve Net Zero emissions by 2050. It found the U.S. ranked in 14th place on Net Zero readiness.

ESG reporting and meeting ESG goals have become major issues for boards and company shareholders. “What’s going to be super important is how will you measure progress on any of these goals under ESG,” said Moats. “In terms of metrics, making sure that they are investor grade, reliable and consistent. There are controls around all of that. Companies have to organize themselves to make sure that the data they’re reporting, whether it’s on a website, a sustainability report or a 10-K is investor grade.”

Firms are attracting young accountants and consultants who are interested in working on climate-related issues. “I would tell my younger self that the accounting profession is a great profession to get into professional services,” said Moats. “Look at not only all of the need out there for jobs, but also look at all the interesting things I could work on, with the non-financial data related to ESG. If you think about ESG, that’s very important for us as a society. You can really lean into those topics as a new graduate.”

Students who are being recruited from colleges and universities are showing interest in working on ESG issues.

“There’s a lot of excitement around the topic,” said Moats. “I still recruit from my alma mater. When I tell them what their job could be if you join our firm, their eyes light up. There’s a lot of meaning and purpose to the work as well. You need to have a connection personally to the purpose of the organization. We are all about building trust in society and really making sure that when we help clients, we help them so that their outcomes could be sustainable.”

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