Ed. note: Today’s post is courtesy of practicalESG.com Advisory Board member Donato Calace. Donato is an active member of the European Financial Reporting Advisory Group (EFRAG) and he brings us this timely update on the EU’s activity toward ESG reporting.
Ensuring good quality disclosures and a clear connection between how business models work and financial and non-financial (ESG) information is one of the toughest limitations of current ESG reporting practices.
This is a challenge that the European Financial Reporting Advisory Group (EFRAG) Task Force on reporting on risk and opportunities and their impacts on business models, of which I am a member, has been working to address over the past year. For context, EFRAG is the same body that received the mandate from the European Commission to create the first set of legally binding sustainability reporting standards in the world.
On the 5th of October, the Task Force released a report on good ESG practices. It includes practical examples from real reports, recommendations of best practices, and indications on how technology can help achieve more reliable, accurate, and credible ESG reporting. The report provides a number of illuminating key findings concerning current ESG reporting practices and their limitations, including:
- Reporting on the business model is not holistically developed and lacks sufficient information to allow for linkage to sustainability risks and opportunities over relevant timeframes, necessary for users to assess the long-term viability of business models. For example: Discussions of destruction of value from underestimating environmental or social risks and/or inaction was also found to be inadequately developed in disclosures.
- Disclosures on sustainability risks and opportunities have limited utility for users (investors and analysts) due to inadequate disclosure on the future cash flow implications of achieving sustainability targets and strategy.
- Use of a variety of existing standards, guidance and frameworks was observed, causing inconsistent use of terms across existing reporting standards, guidance and frameworks which leads to ambiguity in how those terms are used in reports. Ultimately, sustainability risks are disclosed in various locations across corporate reports and lack coherence.
- The link between sustainability strategies and companies’ financial objectives is quite limited. Many companies tend to only report through a general qualitative statement or objectives associating their strategy with the Sustainability Development Goals of the United Nations General Assembly (SDGs), and a few report other factors such as adding value to specific stakeholders.
- There is an insufficient deployment of possible technological solutions (e.g., structured data, AI and other technologies). Data technology has the potential to play a significant role in minimising the reporting burden such as managing data collection, dissemination, and verification, applying science-based targets, and enhancing and enabling the qualitative characteristics that define good disclosures.
- Absence or patchy application of science-based targets when reporting on sustainability outcomes and impacts was a key issue identified.
- Inconsistent use of third-party assurance on non-financial information.
The Task Force identified those main flaws and traced a path to improvement, including a practical table with the do’s and don’ts of sustainability reporting:
In relation to technology, the report presents examples demonstrating how certain technological solutions can enhance qualitative characteristics of good ESG disclosures: there’s much more that tech can do besides tagging information and data management.
The Task Force recommendations are achievable. The report identifies leading companies that are already applying the recommended best practices:
You can learn more about the report by joining Datamaran’s webinar on the 28th of October.
