ESG reporting standards remain ‘unfit for purpose’
ESG reporting standards may have improved, but one of the world’s foremost accounting experts sees much to improve.
Imagine the world’s biggest stadium filled to the brim with fans and players… yet nobody has reached a consensus about the rules of the game about to be played.
This is what’s happening with ESG reporting.
It has grown in importance, and corporates are committing themselves to greater transparency, but when it comes to standards, everyone continues to look to each other for leadership.
And without a universal template, companies jump to the easiest available substitute. Often, this doesn’t seem to help.
What’s the latest?
In a statement latest last month, the CEO of the International Federation of Accountants (IFAC) blasted the continuing lack of ESG reporting standards, claiming that it held entire industries back from true transparency.
While acknowledging the vast increase in the number of countries reporting, he said that 87% of surveyed companies used multiple standards and frameworks to report.
“This patchwork system does not support consistent, comparable and reliable reporting,” he said in a statement at the end of February.
“Importantly, it also does not provide the necessary foundation for globally consistent, high-quality sustainability assurance.”
Quick recap: ESG reporting is essential because…
It’s your sole and crucial channel of communication.
Stakeholders want a clear, concise brief on how your company adheres to environmental, social and governance principles. It’s what guides investor decisions, consumer sentiment, and government oversight.
Your company could be outstanding in all three pillars of ESG but still attract considerable criticism if it can’t communicate that impact properly.
And why are standards so important?
Reports alone won’t succeed in guiding investor, consumer or government decisions regarding ESG, but standardised reports will.
After all, how else can the above stakeholders compare organisations and industries to each other? There is no space for clarity if they all report different data in different ways, focusing on different outcomes.
So we’re stuck right now?
Yes and no; it’s a “glass half full” scenario.
Some critics may praise the fact that many more companies have agreed to report at all. Others will say it’s meaningless if they don’t all report using the same template.
Ultimately, the latter is correct, and it has become the number one issue for stakeholders.
Are we anywhere close to having a universal ESG reporting standard?
We’re at the stage where we have a few solid choices that enjoy widespread use, according to IFAC:
- The Sustainability Accounting Standards Board (SASB) standards enjoyed a 29% increase in usage between 2019 and 2021.
- The Climate-Related Financial Disclosures (TCFD) framework has enjoyed a 30% increase in use over the same period.
Moreover, politicians across international borders are determined to implement more rigorous ESG reporting standards. The above examples (or components of them) could one day narrow towards one globalised way of working.
So, for now?
But unfortunately, for now, we are still a long way from a universal standard.
This will frustrate investors and governments, and the feedback they give will likely frustrate boards and management too. It’s inevitable, given the lack of cohesion.
It also means that progress on industry-wide ESG goals will take longer to assess. Combined with the rhetoric against ESG in many parts of the world, it presents the movement with a problem, calling into question its ability to survive long-term.
The work done in the next few years will decide how that question pans out.
Reporting standards remain a significant barrier to ESG. For pro-ESG advocates, there is a victory in the number of high-level companies committing to it, but if they don’t follow the same template, their work risks getting lost.