Going Beyond Compliance: 4 Key ESG Takeaways from the 2021 Annual Report
Environmental, Social and Governance (ESG) is now a crucial part of the annual report. But how is this playing out in practice?
With the annual reporting season freshly behind us, we recently hosted a series of live and virtual events across Europe, inviting industry leaders to share their experiences and take stock of what they learned this year.
As investor expectations mount and new regulations come into play, ESG is already proving itself to be the biggest disrupter—not only of the annual report, but of entire company structures. Let’s take a look at some of the key points raised by the experts.
1. Companies want to get it right—but that won’t be enough
The annual report looked a little different this year. With the European Single Electronic Format (ESEF) now fully in force, the period hasn’t been without its hurdles: according to the Financial Reporting Council, companies submitted their reports an average of 2.5 times before being accepted.
As well as contending with the new tagging requirements, companies struggled with ESG data gathering and knowing what needed to be audited. For those affected by the EU taxonomy, many felt that the guidelines provided left room for interpretation. And things are only going to get more complex. Next year, companies will have to report on taxonomy alignment as well as eligibility; further down the line, the CSRD will expand significantly on current requirements.
To keep up, companies will need to start planning further ahead. That means adopting processes that are flexible enough to allow for changes, rather than tackling them on a year by year basis. For Zlatko Mehinagic, Audit & Assurance Partner at Deloitte in Sweden, the solution lies in automating as much as possible. ‘Regulatory requirements are driving consistency. Automation allows for this. It allows you to be consistent in your method while being flexible and future proofing.’
2. The link between finance and ESG is now more crucial than ever
We know that ESG isn’t “non-financial”. This is increasingly being reflected in new regulations and the overall push to bring ESG and financial reporting closer together.
But this isn’t just a question of how we conceptualise ESG. From a practical perspective, finance processes are becoming increasingly essential to ESG report building.
Until now, ESG reporting hasn’t had the same oversight requirements as financial reporting, and so is currently having to evolve rapidly. Questions of how to increase the availability of data, provide quality assurance and elevate the report from box-ticking exercise to a value driver are all familiar issues that finance departments have been contending with for years. Embracing automation is one example of how CFOs have managed to spend less time on data gathering and more time using the financial report as a tool for growth.
Bringing ESG in line with finance reporting allows us to draw from past experience while formalising and structuring the process. “The real challenge lies in how the data is controlled,” Simon Atherton, Director at Deloitte UK, reminded us. “ESG data is challenging because we collect it from multiple and often manual sources, but it needs to be placed under the same scrutiny as financial data.”
3. Compliance vs communication: can the report do both?
With the move towards the integrated report, companies are having to contend with a growing issue: its size. According to Andromeda Wood, Vice President of Regulatory Strategy at Workiva, “The annual report is becoming overloaded.” As new requirements get added in each year, there is a danger of ending up with a colossal document that few are likely to read.
So while aligning financial and ESG processes has its benefits, we also need to consider how to get the most out of the end result. For the report to be used for communication and growth, it needs to be designed and presented in a user-friendly way.
One common approach is to break down the information from the report in bite-sized chunks, for instance on the company website. Some companies are choosing to produce an additional ESG report, using the same controlled information from the annual report but presented differently. This allows for one document to meet all requirements while the other is focused on communicating to shareholders and clients.
One of the panelists, a Sustainability Director at an investment firm, called for companies to learn from one another when it comes to report design: “Look at some of the companies who are doing a good job at reporting and copy with pride! The more we standardise reports, the more we can compare data.”
4. We need to think beyond the ‘E’
With all eyes on the EU taxonomy, there has understandably been a great deal of focus on the environmental component of ESG, with less discussion surrounding its social and governance facets.
But, as we know, climate issues impact, and are impacted by, social and governance-related issues. In order to set tangible goals, ESG needs to be understood as a whole.
The truth is that we are likely to start seeing the ‘E’, the ‘S’ and the ‘G’ impacting one another more directly and frequently in the coming years. Viewing ESG as a whole takes these interconnections into account, allowing the company to plan for different outcomes. This allows for a level of flexibility when the unexpected arises while staying focused on their long-term goals.
Luke Graham, Director of Net Zero and ESG at Deloitte UK, explained that at its core, ESG is about effective communication of risk. “It looks at the business risks, the physical risks, the transient risks, and the macro risks,” he said. “If we want to move towards a full circular economy, we need to look at all of these elements together.”
For 2022, companies need to go from toeing the line to clearing the bar. When dealt with on a year by year basis, ESG reporting can all too easily be seen as an increasingly challenging set of hurdles to overcome, with a narrow focus on sustainability. But with the right approach, it can be something more: a chance to seize new opportunities, connect with new investors and customers, and secure the long-term growth of your organisation. In order to do this, though, we need processes that will work for us year after year—so we can stop stumbling on compliance issues, and take a running leap into the future.