EY has released its Corporate Reporting and Institutional Investor Survey findings, coinciding with the release of two significant publications that will influence both how companies report and how investors assess corporate reporting in Australia.
The government’s long-awaited climate-related financial disclosure consultation paper is set to require large companies to report on their emission profile and strategic response to climate change in a standardised and consistent way. It is open for responses until 17 February 2023.
And the Australian Sustainable Finance Taxonomy will ultimately map all economic activities into what is – and what is not – considered sustainable; an important step in bringing Australia into line with our peers and trading partners.
Both are intended to tackle greenwashing and move capital into more sustainable outcomes.
Globally, many countries are introducing sustainable finance taxonomies to help classify activities across the economy as sustainable.
A globally consistent climate risk reporting framework is vital to ensuring Australian investors can make investment decisions in line with their long-term financial interests.
Introducing and mandating standardised climate change reporting will ensure that companies present a complete picture of their risks, opportunities and how effectively they manage their climate change response.
They will be better placed to set sustainable finance targets, develop products, and transparently disclose outcomes against a standardised set of criteria.
ESG fraught with misunderstanding
EY has released its Corporate Reporting and Institutional Investor Survey findings based on research from two separate surveys capturing the views of 1040 senior finance leaders at companies issuing corporate reporting, and 320 senior investors as users of disclosures.
The company found that real risk and impact in ESG and sustainability reporting continues to be fraught with misunderstanding, frustrating Australian investors who remain highly suspicious of the propensity of companies to greenwash.
Emma Herd, the company’s Oceania’s climate change and sustainability services partner, says that as investor demand for transparent disclosures is set to continue to increase it is critical for companies to both understand and address these misunderstandings.
“As long as climate and sustainability reporting remain voluntary, it will be challenging for companies to promote full and frank disclosure, when it may put them at a disadvantage to their competitors who choose not to report at all.”
Emma herd, ey
With 20 years’ experience in climate change, Herd was previously chief executive of the Investor Group on Climate Change and Environment Commissioner at the Greater Sydney Commission.
Herd says there are three important themes for the future of corporate reporting.
- Disconnect between words and actions
According to the survey 80 per cent of Australian investors believe companies are highly selective in what information they provide to their investors. Ms Herd says this raises concerns about greenwashing.
She says that promoting better sustainability or environmental performance clearly provides companies with an unfair advantage – even if it does not present a complete picture.
“Effective and transparent corporate reporting is critical to ensuring investors are making fully informed decisions.
“As long as climate and sustainability reporting remain voluntary, it will be challenging for companies to promote full and frank disclosure, when it may put them at a disadvantage to their competitors who choose not to report at all.”
“Companies need to recognise that ESG is not something that sits alongside your organisation… It is a fundamental dimension of modern business performance.”
Emma herd, ey
She says pressure is increasing for companies to provide a complete accounting of their material risks and opportunities – especially as reporting standards move from voluntary to mandatory.
- Companies are shying away from scrutiny
Almost all investors surveyed (99 per cent) utilise companies’ ESG disclosures as a part of their investment decision-making, including 74 per cent of respondents who use a rigorous and structured approach.
The survey found that 40 per cent of investors believe the lack of supporting evidence and assurance to provide trust in information is a challenge to the usefulness and effectiveness of the corporate ESG reporting they receive.
One in four (23 per cent) organisations surveyed also admitted their current ESG reporting would not stand up to basic assurance standards (reasonable assurance), compared with 41 per cent globally.
99 per cent of companies utilise companies’ ESG disclosures as a part of their investment decision-making
“Investors are looking for actionable, investable data and strategic disclosures, which need to be deeply connected to core company strategy and business decision-making,” Herd says.
“Far too much reporting still sits outside core company strategy and financial reporting rather than being fundamentally embedded within it. Regulator signalling of intent is already changing company behaviour and approaches to reporting.”
She says that better internal risk management, accountability, risk controls and policies to underpin robust data and reporting are essential to credible disclosures.”
- There is a long way to go
The survey found that 96 per cent of investors believe that most companies will only provide limited, decision-useful ESG disclosure – unless there is a regulatory requirement to do so.
Herd says investors and financial markets expect and increasingly demand performance to ESG outcomes.
96 per cent of investors believe that most companies will only provide limited, decision-useful ESG disclosure – unless there is a regulatory requirement to do so.
“Companies need to recognise that ESG is not something that sits alongside your organisation,” Herd explains. “It is a fundamental dimension of modern business performance.
“Businesses that are serious about securing trust and a reputation for long-term focus must ensure that sustainability is built into their reporting processes — systematically, strategically, and rigorously.”
Strong and assured data, robust internal processes, a strategic approach to material issues, and effective performance disclosure remain critical. But ultimately, ESG is also about impact. Significant issues like climate change, inclusive workplace culture, and social equity are all fundamental to a healthy and prosperous society.