The value of sustainability reporting

At its core, sustainability/Environmental, Social and Governance (ESG) reporting is the process of presenting a company’s annual non-financial report to document its performance and progress on ESG-related goals and communicate it to capital markets, institutional shareholders and key stakeholders.

The rise of sustainable practices and increased investments in sustainable development have made sustainability reporting a crucial requirement, especially for medium to large companies. This has also encouraged businesses to start exploring the value of such a report, as well as the motivators for entities to embark on their sustainability reporting journey.

Various frameworks and standards have been introduced to guide accurate sustainability reporting, and support entities in presenting progress towards achieving the United Nations Sustainable Development Goals (UN SDGs), including the Sustainability Accounting Standards Board (SASB), Carbon Disclosure Project (CDP), Task Force on Climate-Related Financial Disclosures (TCFD) and the Global Reporting Initiative (GRI). These frameworks provide guidance and enhance transparency, comparability and credibility in sustainability reporting. Notably, the TCFD was established in 2015 with its first recommendations published in 2017. Multiple countries have made these recommendations mandatory for large companies. Locally, Abu Dhabi Securities Exchange (ADX) has issued guidance on voluntary ESG disclosures to support reporting entities. In addition, the International Sustainability Standards Board (ISSB) recently launched the first sustainability standards, IFRS S1 and IFRS S2, in June 2023. For more information, refer to our article, The dawn of the ISSB standards. You can also visit KPMG’s resource center on implementing the new ISSB standards.

IFRS S1 defines sustainability risks and opportunities as below:

An entity’s sustainability-related risks and opportunities arise out of the interactions between the entity and its stakeholders, society, the economy and the natural environment throughout the entity’s value chain. These interactions—which can be direct and indirect—result from operating an entity’s business model in pursuit of the entity’s strategic purposes and from the external environment in which the entity operates. these interactions take place within an interdependent system in which an entity both depends on resources and relationships throughout its value chain to generate cash flows and affects those resources and relationships through its activities and outputs—contributing to the preservation, regeneration and development of those resources and relationships or to their degradation and depletion. these dependencies and impacts might give rise to sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s cash flows, its access to finance and cost of capital over the short, medium and long term.¹

As the impact of climate change becomes more severe, there is an increased need for reporting entities to address these risks and utilize the opportunities that they may present. Formally disclosing how these risks and opportunities are managed can also ensure that the entity is monitoring and considering them in its strategic plans.

In such situations, sustainability reporting can act as a trigger event – by asking management to disclose such information, the reporting entity will ensure that management teams will go through the risk process to generate the required disclosures.

There are also internal operational advantages to any reporting entity focusing on sustainability practices. For example, a strong sustainability strategy leads to cost reduction through sustainable sourcing and financial arrangements. It can help with streamlining operations, lowering expenses and ensuring long-term sustainability. Moreover, sustainable strategies can boost employee satisfaction, leading to higher productivity and a more motivated workforce. However, these initiatives cannot be quantified for improvement if the entity’s reporting policies are not considered. Sustainability reporting provides a wide range of frameworks, guidelines and tools, enabling entities to quantify their benchmarks and KPIs (key performance indicators).

Investors are now demanding greater transparency in sustainability policies, management, and the entity’s impact on its prospects. Sustainability reporting allows companies to showcase their commitment to sustainable practices and create a more sustainable world. It also gives them the opportunity to share their story and demonstrate their progress towards sustainability targets.

By embracing sustainability reporting, organizations can gain competitive advantage. Consumers who seek green alternatives are always on the lookout for brands who want to showcase their commitment to environmental and social responsibilities. As customers become increasingly aware of sustainable practices, having a larger emphasis on sustainability reporting can have a beneficial impact on brand popularity and reputation.

This can also reflect positively on the entity’s access to capital, improve its investment returns and help businesses avoid risks associated with stranded investments.

The urgency of the need to address sustainability related issues is reflected through several international initiatives, including the United Nations General Assembly’s sustainable development goals which are designed as a blueprint to achieve a better and more sustainable future for all. The signing of The Paris Agreement²  in 2015 at the UNFCCC'S COP 21 also offers a robust framework to drive sustainable development globally.

As a result, many countries have started regulating sustainability related reporting including De Nederlandsche Bank, the first central bank to sign the principles for responsible investment (PRI). Banque de France is also the first central bank to publish information about its climate-related risks' exposures in line with TCFD recommendations. Countries are now considering the recommendations of the TNFD (Taskforce on Nature-related Financial Disclosures) and we expect that countries will gradually start recommending reporting in line with the TNFD.

• Abu Dhabi Securities Exchange (ADX) and Dubai Financial Market (DFM) have made a formal commitment to promote sustainability in financial markets by joining the Sustainable Stock Exchange (SSE) initiative, which is led by the United Nations
• ADX has issued a voluntary sustainability disclosure guide outlining the essential sustainability indicators for its listed companies to align with these recommendations
• On April 2021, the UAE Securities and Commodities Authority (SCA) stated that all listed companies will be required to publish an annual sustainability report and comply with the GRI standards and any other requirement issued by the relevant stock market 
• Abu Dhabi Global Market (ADGM) introduced ESG disclosure requirements in July 2023 and has published its regulatory framework for sustainable finance which comprises ESG disclosure requirements and a regulatory framework for funds, discretionary managed portfolios, bonds and sukuks designed to accelerate the transition of the UAE to net zero greenhouse gas emissions

The above initiatives demonstrate a keen interest in the market regarding mandatory sustainability reporting, as well as demand for information assurance to increase the entity’s perceived level of trust.

Building on the above, It is increasingly becoming a necessity for companies to engage in sustainability reporting to survive and thrive.