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27th Feb, 2023

Chris Willsher
Chris Willsher
Job Title
Senior Regional Director

Corporate transparency has become increasingly important in recent years, with businesses scrutinised for how they operate in terms of leadership, day-to-day running, and auditing processes. Together, these now sit under an ESG umbrella, comprising a company’s environmental impact; its contribution to society, including duty of care to employees; its contribution to local and global community issues such as training, charity work and labour rights; and its ethical practice.

Accountancy and finance firms are being closely observed by stakeholders reassessing their own values and standards and wanting to be seen to work with like-minded businesses. While still a fledgling concept, ESG has gathered momentum, sparking a desire to keep up with the times and demonstrate a commitment to change, or risk alienation from potential partners and employees.

Accountancy professionals are therefore having to educate themselves on the subject, in order to advise clients and customers on steps they might take to improve their ESG ‘appearance’ to others.

ESG reporting: setting the standard

So, what should ESG reporting look like? The Financial Reporting Council (FRC) – regulator of auditors, accountants and actuaries – has recently published the first of three reports, ‘Improving ESG data production’, outlining steps it will take to help businesses with the production, distribution and consumption of their ESG data. Once complete, the reports aim to help businesses identify and collect the data they need, understand how to make operational changes/improvements from their findings, and share the information with stakeholders, reporting to a yet-to-be-confirmed universal standard.

The guidelines will be largely influenced by the newly-formed International Sustainability Standards Board (ISSB) – part of the International Financial Reporting Standards Foundation (IFRS) – founded to create consistent global ESG reporting standards. The body will become a type of library for subscribers (investors, consumers and other interested parties) to assess companies’ ESG standards, perhaps to help them decide whether to work with them before approaching them, or to check what competitors are doing.

This should be good news to those wrangling with the topic, clarifying expectations on a subject that can feel overwhelming. Ultimately, ESG should inform strategic decision-making, save money – pinpointing where efficiencies can be made – and provide assurances into areas that were perhaps under-researched, such as provenance, supply chain, risk, opportunities, wellbeing and energy usage.

With the first phase – ESG data production – now complete, the FRC has confirmed it will take action to develop codes, standards, guidance and expectations, and “work with and influence standard setters, regulators, market participants and other stakeholders to build a system that is forward-looking and fit for purpose.”

ESG data: why we need it

In their work, the FRC has identified three elements of ESG data production to explore the current landscape, the challenges, and positive actions to address them:

  • Motivation – what motivates the company to collect ESG data and how does it identify what is needed?

  • Method – how is ESG data collected?

  • Meaning – how is the data used within the company and how does it impact decision-making?

In a podcast ‘Improving ESG data production’, Phil Fitz-Gerald, Financial Reporting Lab Director at FRC, said: “Company systems and controls [for ESG data] are not as mature, perhaps, as for more established financial data. This is about companies organising themselves to produce data they can rely on in the same way they have for financial data.

“Companies need to think about where they’re setting long-term targets or making adjustments to their business model or strategy, and how they are going to measure the success of that in a consistent way over a period of time.

“I think in collating ESG data, or developing company systems and controls around it, companies can learn a lot from the way financial data has been processed in the past. In doing that we’ve heard from companies that there’s a much closer relationship between finance and sustainability teams in order to enhance the processes and controls and the connections between the data.”

ESG data: collection strategies

Research published in 2021 based on responses from more than 100 banks, insurers and wealth and asset management companies, found they regarded the lack of available relevant data as the single greatest challenge preventing them from adequately addressing climate risk, according to a survey by insurance services firm Willis Towers Watson.

So what steps are financial organisations taking right now? As one of the Big Four accounting organisations, KPMG is setting an impressive example to others as well as playing an advisory role.

The firm’s Paul Henninger, Head of Connected Technology in the UK, said: “To progress the ESG data conversation, KPMG have collaborated with Google Cloud to develop a [Closing the disconnect in ESG data – Financial Services] report that looks at today’s ESG landscape and dive into some of the data challenges that businesses face. Within this, we look at why financial service firms desperately need more ESG data, where they currently lack the data and analysis they crave, and how they might begin to close some of these gaps.

“A good starting point is to look at existing systems and processes. Legacy systems and records that are out of date are already driving remedial actions. Inconsistency, a lack of standardisation, self-assessed disclosure and patchy coverage are all big issues when gathering and comparing data. As we dig deeper into these problems, we gain a better understanding of the problems and we start to create a roadmap to the answers.”

As KPMG’s report states: “The business case for transforming ESG data capabilities is compelling. Financial institutions have an opportunity to secure competitive advantage while simultaneously improving their chances of delivering positive societal outcomes.

“Perhaps most excitingly of all, ESG data transformation creates opportunities for financial institutions to build new value propositions – to develop new products and solutions for clients that add value and drive revenue growth.”

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