As featured on BusinessMirror: Developing an effective ESG reporting strategy
Uncertainties concerning reporting requirements and disclosures are among the biggest challenges in the world as organizations navigating their Environmental, Social and Governance (ESG) journey.
The obligation for companies to report on their financial performance and disclose information that may affect their trading performance is not new. The developing ESG framework, however, is introducing a whole new strip of requirements and obligations. Moreover, the penalties for non-compliance are substantial, in terms of both financial consequences and reputational risks.
In this article, we highlight five key areas for businesses to focus on when developing their ESG reporting strategy.
1. Strategy and approach
A key challenge is to ensure there is no conflict between compliance with ESG reporting requirements and the business’s growth strategy.
Embedding ESG into an organization’s strategy is difficult because ESG itself is incredibly broad, encompassing many stakeholders with competing interests. While there is generally an ESG or sustainability owner or committee clearly identified in an organization, the owner of ESG reporting is often less clear.
- Assess materiality to determine metrics and KPIs for reporting and disclosures;
- Determine the appropriate approach for scenario analysis.
2. Mandatory requirements, governance and framework
Keeping up with these rapidly evolving frameworks also means teams must continually develop their knowledge and understanding of obligations and implications, making it harder to define and adhere to a clear timeline for ESG reporting.
Meanwhile, existing frameworks require increased robustness to ensure the processes and controls are at the level of financial reporting.
- Identify mandatory frameworks and scope of reporting by jurisdiction;
- Decompose/interpret the requirements;
- Identify reporting differences for Group reporting;
- Develop policies and manuals.
3. Target operating model – Processes, data and systems
There has been a lack of investment in developing an ESG reporting framework that is consistent with the financial reporting framework.
Consequently, there are significant gaps and weaknesses in ESG reporting around issues such as data quality, highly manual processes, and the lack of robust controls.
The challenge for corporates is to design a target operating model (TOM) that facilitates ESG planning, reporting and monitoring, while also aligning with emerging mandatory reporting requirements, such as the UK SOx regime.
Ensuring a robust TOM is vital to ensure readiness for limited assurance or audit.
- Design a TOM that aligns both ESG and financial reporting priorities.
4. Resource challenges for SMEs
Companies that are ‘smaller’ but still meeting the threshold to report, will struggle to get up to speed with the requirements and will end up implementing ESG reporting ‘by the side of their desks’.
Limited resources in financial reporting and risk functions, for example, could hinder the effective monitoring of ESG compliance and reporting (including internal management reporting).
One solution is to develop appropriate training programs and materials, but the emerging nature of ESG requirements imply that training modules rapidly become out of date as obligations and reporting regimes continue to evolve.
- Allow current resources to undertake external training and thought leadership events;
- Engage with peers in forums to understand how ESG is implemented;
- Attend external forums and engage with external SMEs to obtain knowledge transfer; and/or support.
5. Reporting and disclosure structure
Current requirements and investor pressure are causing organizations to focus on demonstrating compliance rather than disclosing opportunities.
While we continue to see new regulatory requirements, there is a drive to achieve convergence.
The new International Sustainability Standards Board (ISSB) requirements expect companies to disclose ESG-related information in the annual report, with limited linkages to external reports. However, there is an expectation that ESG disclosures in the front half of an annual report will be linked to the financial statements. This represents a significant uplift from what is currently disclosed.
To address these requirements, companies will need to move to business-as-usual ESG planning, reporting and monitoring, consistent with their financial, regulatory and reporting obligations.
- Consider automated solution for reporting;
- Ensure greater involvement of finance, particularly in defining the controls framework, assessing data or other reporting aspects;
- Implement independent review of process and controls over reporting, relevant for assurance readiness.
Case study: Ensuring ESG assurance readiness in a global insurance company
Our client, a global insurance company, sought to obtain reasonable assurance from its external auditors on its TCFD statements for 2021. It has a longer-term goal to achieve the same for all its ESG disclosures.
The company has a mature SOx-style controls framework for its financial reporting processes and controls and sought to define and align its ESG processes to help achieve reasonable assurance. To ensure rigour and clarity in climate reporting, the client also required support from KPMG in drafting a climate reporting manual.
Our Financial Services ESG team provided end-to-end support that enabled the client to achieve its ESG and Task Force on Climate-related Financial Disclosures (TCFD) objectives. This included:
- Developing a detailed climate reporting manual which was embedded into the client’s suite of financial reporting manuals
- Producing process maps to support TCFD climate metrics, highlighting risk and controls and building a detailed SOx-style risk and controls matrix (RACM). As part of this, we highlighted control gaps and improvement areas.
- Drafting a report setting out the remediations required and then supporting the client to deliver the identified remediations.
- Assessing the remaining ESG metrics (over 100 KPIs) and prioritizing the highest risk items. We then process-mapped these items and developed RACMs that highlighted controls gaps and improvements.
- Supporting the implementation of a new risk and controls tool that will host the process maps and RACMs. We worked with the client and an external supplier to tailor the approach to accommodate TCFD and broader ESG reporting.
What was achieved?
- Better clarity on ownership of processes, risks, controls, data, and reporting requirements;
- Clear remediation plan for gaps in risks and controls;
- Readiness for assurance and clarity on areas where issues may arise;
- Comfort for the audit committee in terms of controls governance standards.
How KPMG can help
Our ESG specialists bring a wealth of experience across industries and skillsets with the ability to transform your reporting and disclosures.
The excerpt was taken from the KPMG Thought Leadership publication entitled Journey to a sustainable future: Five tips for developing an effective ESG reporting strategy: https://home.kpmg/uk/en/home/insights/2022/07/journey-to-a-sustainable-future.html