Moving Beyond the ESG Blind Spot

When it comes to environmental, social and governance (ESG) issues, finance leaders and investors may have different priorities.

The majority of investors recently surveyed say they want evidence that companies are taking their ESG commitments seriously, seeing it as a sign that finance leaders are thinking with long-term growth in mind. Surveyed finance leaders who face short-term earnings pressure from investors say the long-term sustainability efforts they do make go unrecognized.

The latest EY Global Corporate Reporting and Institutional Investor Survey highlights the need for companies to rethink how they engage with investors on topics around sustainability. Case in point: 80% of investors surveyed expressed that many companies don’t properly articulate the rationale for long-term investments in sustainability, making it difficult for them to evaluate these investments. And while 78% of investors surveyed think companies should make investments that address ESG issues relevant to the business, even if it reduces profits in the short term, only 55% of surveyed finance leaders responded the same way.

ESG isn’t just a compliance and reporting exercise; it’s an opportunity for finance leaders and boards to go beyond the numbers and clearly articulate their long-term thinking.

“If an investor is deciding between two peer companies, and one company is doing a great job of articulating their long-term vision and business strategy, that company is much more likely to get the investing dollar than the company that’s just focused on the next 13 weeks,” says Dana Bober, EY Americas Financial Accounting and Advisory Services Leader.

But even CFOs and boards who place a high value on ESG face another challenge: a reporting infrastructure that is not fit for purpose for ESG.

“The infrastructure that exists for finance leaders was built for financial reporting, not sustainability reporting,” says Bober.

Regulators, meanwhile, are working to address this concern by developing reporting mechanisms that capture ESG data and insights. The US SEC, the EU and the UK all have new ESG reporting rules in the pipeline.

Shareholders and regulators are encouraging the same thing: for companies to provide relevant, business-specific ESG data that demonstrates their long-term strategy. Zeroing in on that data, however, can be a challenge for businesses.

The first step toward building a new process to report on sustainability data and demonstrate a company’s long-term thinking to shareholders is a prioritization assessment.

“There’s so much in the ESG universe that it’s impossible to tackle it all, which is why prioritization assessments are key,” says Velislava Ivanova, EY Americas Chief Sustainability Officer and Climate Change and Sustainability Services Leader. “It allows businesses to really determine what is important to them, their business and their stakeholders.”

Next, finance leaders should undertake readiness assessments to understand what they need to develop once the regulations go into effect. A good assessment will inform finance leaders of where they need to collect data, what targets they need to set, and ultimately what processes and procedures they need to achieve their goals.

Few requirements will come as a surprise — the EU’s are already defined, and the proposed SEC rules are the topic of much discussion — so companies are in a great position to prepare now.

Rigorous financial reporting builds trust with shareholders, and ESG reporting is no different. By holding ESG disclosures to consistent standards, businesses can prove to shareholders that they are thinking through any challenges on the road ahead and creating the resilience to tackle them head on.