How can ESG reporting fuel positive change?

Companies are doing better at addressing emerging reporting requirements but must not lose sight of impact.

In brief

• Sustainability reporting maturity continues to demonstrate incremental improvement.
• The focus however remains on metrics – not on real-world impact and outcomes.
• Future reporting must reflect deeper understanding and clear impact.

For each of the past four years, EY has assessed the ASX200's sustainability reports to get a snapshot of ESG reporting in Australia. This year’s ESG Reporting Maturity Assessment (pdf) (‘the assessment’) draws on publicly available reports issued in 2021, and assesses these reports against nine criteria using the EY Sustainability Reporting Maturity Model (refer to the table at end of this article for description of criteria).

This year’s assessment shows the ASX200 continues to improve it’s reporting maturity in the context of new standards and frameworks and ever-increasing demand from investors, customers and other stakeholders.

The assessment found a 6% year on year increase in average maturity score, with the biggest increases seen for the criteria Governance and management (up 19%), and Vision and strategy, Materiality and Metrics and targets (all up 8%). This aligns to what has been observed in practice.

Not surprisingly, organisations at the top end of the ASX tend to score highest. However, the gap is narrowing, with improvement rates of those companies declining and some companies in the lower listing grades maturing rapidly after just a couple of years of reporting. For example, the ASX150-200 and ASX100-150 improved 27% and 24% respectively over the four-year assessment period, compared with 16% in the ASX50. Notably, between 2020 and 2021, the average maturity score for the top 50 plateaued.

In 2021, aligned to the expectations of the coming ISSB standards, our assessed companies also moved towards more integrated reporting. As more businesses considered the nonfinancial risk implications on enterprise value and future revenue flows, 16% of the ASX200 companies assessed produced an integrated report – up from 4% on the prior year, and a significant jump from four years ago.

‘Governance’ improves but ‘Balance’ and ‘Impact and outcomes’ lag

The standout improvement across our nine criteria was in the Governance criteria. On average, Australian companies have jumped from ‘developing’ to ‘established’ in this criterion, indicating that reports now have detailed discussions of sustainability governance and management. This aligns with what we are seeing in the market, with boards driving a stronger focus on ESG and senior executives further engaging in and maturing their approach to sustainability data and disclosures, including CFO consideration of impacts on financial statements.

In response to the evolving reporting frameworks and standard, and investor demand for more metrics and better progress measurement, as outlined in the 2021 EY Global Institutional Investor Survey (pdf), the assessment finds companies increasing their number of sustainability key performance indicators (KPIs) and aligning some targets and commitments to material sustainability areas. This is helping stakeholders to understand how metrics are linked to sustainability strategy and allow for year-on-year comparisons of progress.

However, many reports are still missing balanced disclosure and explanations of the desired or actual outcomes these metrics are tied to. Balance has improved the least over the four years, with an increase of just 10% over this period - the smallest increase across the nine criteria, followed closely by Impact and outcomes at 15% over the same period. This suggests that while companies are deep in the weeds of improving data and grappling with integration, they may not always be demonstrating impact and outcomes in sustainability performance.

In other words, companies are reporting the data but failing to articulate the business context and connection to the industry and value – or tell a balanced story about their actual sustainability performance.

Can assurance move the dial?

The assessment found a 29% increase in the number of ASX200 companies using assurance to underpin the quality and credibility of their sustainability disclosures - the most significant shift in assurance uptake over the four years of assessment.

Traditionally, assurance has focused on establishing the integrity and validity of disclosures, including statements and reports, or checking the veracity of numbers against criteria and standards. While we expect the scope and scale of this type of assurance to grow, and are witnessing this occurring in leading organisations, we believe expanding the breadth of assurance to include principles-based assurance would drive confidence in the robustness of sustainability performance information.

The results of the assessment underline the importance of all stakeholders – regulators, companies and assurance providers – to collaborate to drive an impact-focused assurance approach that pushes attention away from reporting and onto action.

How should future reporting evolve?

As this assessment shows, companies are improving in the maturity of their reporting, reflecting a top-down approach to sustainability and drive for more and better information from stakeholders.

Within organisations, we observe the elevation of ESG reporting to the C-suite with Chief Financial Officers and Chief Executive Officers and now the Chief Sustainability Officer, increasingly driving the conversation as part of a wider convergence of non-financial and financial issues.

It is expected that this focus at the C-suite and board level will only increase with the continually evolving reporting landscape (and potential future regulatory changes as a result of the forthcoming ISSB standard).

This further reaffirms that, when it comes to ESG reporting, we have to continue to do better. Doing better includes:

• Using reporting frameworks and applying reporting principles, particularly balance and context
• Investing in better systems and processes
• Obtaining assurance to give confidence on data reported
• Moving towards reporting on impact
  

The ESG reporting process is a deeply important mechanism that allows companies and boards to understand their current position and chart a path to better ESG performance and drive positive impact.

As ESG continues to elevate throughout an organisation, companies need to acknowledge the investment required to bring the level of reporting up to that of financial reporting.