Praxity Alliance Member Firms Take a Lead on ESG Reporting
The world is changing, quickly.
Across the last three years, we have seen profound changes to the way we work. Across corporate spaces, there is a focus on impact and on building a better, fairer and more cohesive world.
Businesses have become ever more aware of the challenges that we face today, as well as how they may develop in the future. This is abundantly true of the financial and accountancy industries, who are at the forefront of changes to business practice. Future generations will be left to reckon with the decisions we make today, in ways that can be difficult to foresee.
Praxity’s latest Thought Leadership piece, Navigating the ESG Landscape, takes on Environmental, Social and Governance reporting, examining the past, present and future of this crucial area.
ESG reporting is the subject of incoming legislation worldwide, with significant push and pull between competing interests, and seeks to address the following:
- To integrate wider social issues into the fabric of business strategy
- To provide a framework to assess how a business interacts with the world
- To manage how a business appears to investors
- To inform stakeholders how a business is managing risk
The three areas of inquiry, while being discrete, have deep interconnectivity and cover many aspects of broader business operation.
The environmental component looks at how a company is exposed to and manages risks and opportunities, specifically related to themes such as climate, natural resource scarcity, pollution, waste, the company’s carbon footprint and other environmental factors. With challenges around meeting governmental targets, assessing the impact on climate change and looking after our world, it’s a key area to assess.
The social component concentrates on information about the company’s values and business relationships. This can be both inward looking towards company culture, or outward looking to the wider world, including areas such as human rights, community relations, staff pay and benefits, working conditions, safety, inequality and philanthropy.
The governance component focuses on information about a company’s corporate control. Governance can cover issues such as transparency, fairness, accountability, leadership, key strategies, business culture and stakeholder engagement. It could include information on the structure and diversity of the board of directors, executive compensation, critical event responsiveness, corporate resiliency, and policies on bribery and corruption.
We examine popular frameworks and relevant agencies for ESG reporting, including:
- Triple Bottom Line Accounting
- Integrated Reporting
- The UN’s Sustainable Development Goals
- The Value Reporting Foundation
- The Sustainability Accounting Standards Board
- The EU Corporate Sustainability Reporting Directive
- The Value Reporting Foundation
These methods and agencies offer important guidance on how to explore your own company’s ESG, with overlap and interlacing providing an ever-clearer picture of the matters at hand.
A Quick Guide to ESG Reporting
The company’s sustainability team, with increasing movement towards the company’s finance team. There is a growing trend of employing the services of external assurers to report on a company’s behalf.
They report on the most material ESG topics for the business (e.g. commitments, progress, case studies) as well as regulatory requirements.
Externally, reports are usually annual, in line with the financial reporting. Internally, most larger companies now report monthly or quarterly on key ESG measures.
Some have a standalone sustainability report, some do a report on business operation. Good practice is to have a ESG databook containing all key disclosures, so the data is easily accessible to investors.
There are many variations in how this reporting is performed, what it considers and what standards it conforms to. Reporting can be done internally by the company’s relevant teams or outsourced to an external agency.
The ESG outlook is changing quickly, with the aim of formalising the best practice that firms have long been doing. Proper ESG reporting is soon to be mandatory in many jurisdictions and will only become more important in coming years. Understanding how to measure, understand and use ESG data will set any organisation on a smoother path to a successful future as a business. Laws being introduced across the EU, as well as by state in the US, are likely to have the rest of the world following close behind.
How You Manage ESG Challenges Reflects on Your Business
While some social and environmental indices can be demonstrated, some by their very nature are intangible. Having a reliable data set, both internally and externally, can provide a measure of how much progress has been made, how much is left to do, and what the benefits have proved to be. Companies must think of themselves as key players in the society in which they operate.
McKinsey (2022) identifies three levels of ambition in ESG practice:
Minimum Practice – Risk Mitigation – reactive, “do no harm” measures. Limited to hitting the baseline operating standards expected of the company.
Common Practice – Substantive Efforts Outside the Core Business – track trends, implement inclusive HR strategies, run strategic programs, engage with stakeholder groups, use strengths to deliver increased value across ESG metrics.
Next Level Practice – Full Integration of ESG into Strategy – embed ESG in capital and resource allocation, improve sustainability internally and externally, take part in full ESG disclosures, increase social impact. Leverage innovation in ESG practice to move the needle on sector standards.
Measurements can be improved over time, with frontrunners demonstrating how important ESG can be to the overall running of a business.
Whether for investors, stakeholders or the wider public, we consider how the three poles of Environmental, Social and Governance tell important stories about your leadership, giving an indication of how well a company can respond to challenges, as well as how well it can operate in a wider social context. A company’s non-financial information can give important clues to future risks and development, and sincere reporting can lead to important introspection and growth.
We look closer at what Praxity Alliance members are doing to stay at the forefront of change, both for their clients and for their own businesses, examining how they explore and measure risk and opportunity. Being able to work together across borders means mitigating risk, with firms offering support and expertise when establishing ESG methodology and addressing concerns that weigh on future operation.
We would like to extend a huge thank you to the following people within the Praxity Alliance for their invaluable contributions to the piece and for their generosity with their time:
- James Kallman, CEO, Moores Rowland, Indonesia
- Edward Olson, National Leader, Environmental, Social & Governance, MNP LLP, Canada
- Sophie Parkhouse, Partner, Albert Goodman, UK
You can read the Thought Leadership article, along with insights from Praxity Alliance member firms here.