Businesses Must Overcome ESG Reporting Challenges to Satisfy Investors

Over the past few years, we’ve seen more and more companies up their game when it comes to environmental, social and governance (ESG) reporting.  

And while it’s great that more is happening on that front, there’s definitely room for improvement when it comes to ESG reporting and meeting the wants and expectations of investors. 

A 2022 survey from EY (a Fair360, formerly DiversityInc Hall of Fame company) shows that companies and their investors are at odds when it comes to sustainability efforts, which could hinder access to capital and decarbonization efforts for many companies. 

The report unveiled that 78% of investors want businesses to prioritize ESG efforts, even if it causes a dip in short-term profits, but only 55% of business leaders are willing to do so. And 53% of businesses said their long-term investments are “impeded by investor pressure to show short-term gains,” according to EY. Of the finance leaders surveyed, 20% said investors don’t care much about long-term investments, even if they do relate to sustainability. 

While these issues have arisen, companies do recognize there’s room for improvement in their approach to ESG reporting. Just 54% of the companies surveyed said they give investors sustainability data, leaving a large percentage of those who do not. And 41% of finance leaders said their current ESG reporting would not stand up to “reasonable assurance” standards.

In a company statement, Dr. Matthew Bell, EY Global Climate Change and Sustainability Services Leader, said “there’s no denying that companies are making headway on their sustainability credentials, and they are doing so against a tide of economic volatility and geopolitical uncertainty. But these efforts can only hit home if they are seen as credible.

“What this survey shows is that businesses and the investors they rely on still have very different goals and expectations in relation to sustainability. But this is much more than a difference in perspective: It’s a disconnect, which poses a real threat to the smooth running of capital markets and ultimately the fight against climate change.”

Investors Don’t Trust Corporate Sustainability Reporting

A survey conducted by PwC (a Fair360, formerly DiversityInc Hall of Fame company) shows that 44% of the investor community survey believes that fighting climate change should be a “Top Five” priority for businesses, even amid threats such as inflation and macroeconomic volatility. 

While investors rank sustainability high on the list of priorities for companies, they don’t necessarily trust corporate sustainability reporting efforts. Of the investors surveyed, 78% said they’ve seen a large number of unsupported claims around sustainability performance from companies and 87% said unsupported claims were present in sustainability reporting to a limited extent. 

Just 2% said there are no unsupported claims in corporate sustainability reports. These unsupported claims are also known as “greenwashing,” which is when a green spin is put on a company’s PR and marketing to make it seem like it has environmentally friendly products, operations, etc. 

“When almost eight out of ten investors tell us they suspect greenwashing in corporate sustainability reporting, companies and regulators should take note. The lack of trust is troubling as sustainability information becomes increasingly important to both investors’ and other stakeholders’ decisions. There is a need for companies to improve their data, systems and governance, and for regulators to continue the move towards globally aligned and interoperable reporting and assurance standards,” Nadja Picard, PwC Global Reporting Leader, PwC Germany, said in a company statement. 

To have more confidence in corporate sustainability reporting, 75% of investors surveyed by PwC said the levels provided in financial statements known as reasonable assurance, would help boost that confidence. Seventy-two percent of the investors said assurers need to have independence and ethical standards, and 73% said having “professional skepticism” is important. Most importantly, investors (78%) expect assurance practitioners to be subject matter experts when it comes to ESG. 

In a company statement, James Chalmers, PwC Global Assurance Leader, PwC UK, said: “Independently assured information helps to build trust in capital markets and in companies’ performance on key issues like sustainability. But to build trust effectively, assurance must be high quality, with strong professional standards and a combination of audit and subject matter expertise.”