Journey to a sustainable future: A controlled approach to ESG reporting

UK corporates face a seemingly unending stream of new requirements around ESG reporting, from Task Force on Climate-related Financial Disclosures (TCFD) and International Sustainability Standards Board (ISSB) to the EU and UK taxonomies and, in the US, SEC and sector specific requirements such as National Association of Insurance Commissioners (NAIC) climate related disclosures.

A diverse range of businesses will be affected by this rapidly evolving reporting environment, but financial services firms, in particular, need to be ready for a whole new swathe of sustainability reporting requirements.

Historically, much of the sustainability reporting that firms have done has sat outside the Finance function in dispersed pockets of expertise within the business. But as reporting frameworks have become clearer, requirements stricter, and expectations on quality higher, there is increasing pressure from both inside and outside the boardroom to treat sustainability reporting with the same robust, systematic, and controls-focused approach that is used with financial reporting.

Consequently, ownership of sustainability reporting is typically moving into the Finance function. It’s Finance that is being charged with the task of understanding the requirements, what data is required, the sources of this data and the data model required to organise this across all reporting requirements. Their challenge is to build a reporting system with supporting processes, controls, and assurance, that is flexible, scalable, and repeatable, and that produces a robust ‘single truth’ of KPIs and supporting metrics across all aspects of E,S&G. This needs to be capable of meeting the demands of all three layers of reporting: externally published reporting and disclosures, regulatory reporting direct to regulators, and internal management reporting and forecasting.  Taking an end-to-end data, systems, process, and controls-based approach will enable firms to fulfil their reporting obligations much more efficiently, without needing to substantially increase headcount to process data and produce reports. This is particularly important for life insurers and asset managers, where the FCA requires reporting at both the entity and product level for FY22 onwards.

At KPMG, we’ve been working with a number of major financial services providers to help finance navigate this journey. The outcome of our work is focussed on getting the business’s non-financial reporting to the same quality and reliability as its financial reporting equivalent, with appropriate levels of controls, testing and assurance and in a manner that supports and clearly articulates the overall ESG strategy and the progress towards achieving this.

Using our ESG Reporting Maturity Assessment Model, we facilitate the development of a target state design.  This design needs to answer the following key questions:   

• What metrics do we want to report externally and which of these do we consider to be our Key Performance Indicators?
• Do we have appropriate and consistent definitions in place and governance established to support future changes to these?
• What operating model should be in place to support this reporting, including consideration of roles and responsibilities, accountabilities, and structures such as centres of excellence and/or shared services?
• What is the end-to-end data and systems solution required to deliver the reporting of these metrics?
• Do we have a control framework in place over our non-financial reporting and what assurance (both internal and external) do we need over these metrics?
• What management information do we require internally to track our progress against forecasts and what is the required cadence across each aspect of E,S&G? 

With a design for the target state developed, it’s then important to work through planned transition states focussed initially on immediate reporting requirements for the year ahead and building incrementally to get benefit early, but always with that end state in mind.  Building an approach which is agile enough to accommodate new strategic priorities and regulatory requirements, whilst also bringing rigour is at the core of the approach.

Importantly, through our practical implementation work to date, KPMG has developed a number of assets that can accelerate both the design and implementation journey, including:

• Detailed benchmarking of financial sector ESG metric disclosures
• An illustrative data and systems architecture for non-financial reporting
• An ESG reporting data model;
• A Non-financial reporting controls framework;
• A TCFD based suite of entity level controls
• Process and control templates and libraries for common processes, such as scope 3 in sovereign investments, climate scenario modelling and selection of data proxies
• Illustrative metric definitions and business requirements documents

ESG reporting may see like a daunting prospect, with increasing and fluid requirements, greater pressure both internally and externally for more accurate and focussed reporting, however with structure and the right approach, progress towards your outcomes can be achieved quickly.

If you would like to understand how we can support your organisation on your ESG journey contact us today.