How Asia-Pacific companies can bridge the ESG trust gap with investors

Increasing scrutiny from investors who want to see more ESG action

The 53% of Asia-Pacific executives who think investors are putting even more scrutiny on their performance against ESG goals are absolutely right. Asked about their level of scrutiny, 73% of investors said they are evaluating nonfinancial disclosures in a “structured and methodical” manner. Only 2% said they conduct little or no review.

When it comes to ESG, investors believe organizations should be playing the long game. According to the survey, almost three-quarters of the region’s investors (74%) say companies should invest in improvements relating to ESG matters – even if it dents their short-term profits. But only 58% of Asia-Pacific business leaders hold the same view.

The survey does highlight some common ground between businesses and their investors.

Interestingly, many businesses do seem to recognize that there is room for them to improve their approach to reporting. Just over half (54%) of the organizations surveyed said they provide investors with relevant information on sustainability activity, leaving a significant percentage who recognize that they do not. Two-fifths (41%) of finance leaders interviewed also admitted their current ESG reporting would not stand up to the scrutiny of basic assurance standards. 

Ultimately, both sides agree on the weaknesses of current reporting standards, noting that issues include the following:

• Lack of requirements for supporting evidence
• Separation of ESG reporting from mainstream financial reporting
• Lack of forward-looking disclosure

Companies need to take immediate action to close the trust gap 

To better meet investors’ expectations, our research shows that Asia-Pacific companies need to take the key actions below.

1.  Build a better understanding of investors’ sustainability expectations, and how disclosures can address material ESG issues and earn stakeholder trust.

• Focus – Investors are working to align their portfolios to net zero. Companies should respond with robust insights into the important opportunities and risks, including transition risk, physical climate risk and climate scenario analysis – as well as the bottom- and top-line potential of a company’s climate investments. Organizations should focus their efforts on prioritizing materiality, benchmarking disclosures against peers and preparing for the new International Sustainability Standards Board (ISSB) standards.
• Accountability – Companies should meet investor requirements for robust governance and board oversight around sustainability. That might mean moving from ESG pledges to progress and results. Or it might mean a clearer focus on ESG stewardship. Investors also expect continual engagement with company leaders around the organization’s material progress against sustainability goals. Boards and executive teams will therefore require meaningful and credible sustainability data and insights to demonstrate how the company is making informed decisions and measuring and managing progress.
• Transparency – Companies should also respond to investors’ calls for more consistent, comparable and reliable ESG disclosures. This means getting ahead of emerging global reporting standards, improving ESG data quality and using assurance to build trust. In Asia-Pacific, 92% of investors believe it’s important that ESG reporting and data receives independent review and assurance.

2.  Begin integrating sustainability reporting with finance.

Eventually, uptake of the ISSB standards mean financial and sustainability reporting will become integrated. As a starting point, finance leaders and teams should more closely connect with the sustainability reporting agenda:

• Address the data challenge – Finance functions will need to gather, clean, analyze and visualize nonfinancial data to both support reporting and decision-making.
• Collaborate across organizational boundaries – Finance teams will be required collaborate with sustainability teams and the broader enterprise to transform the quality and accessibility of ESG data and solve how to calculate the P&L impact of nonfinancial information.
• Upskill the finance team – Finance people should be embedded in sustainability teams to learn about the nuances, limitations and implications of nonfinancial information.

A company’s sustainability disclosures provide vital insights to help the region’s investors understand the impact of sustainability issues on a business’s performance, risks and long-term growth prospects.

Asia-Pacific organizations that are serious about securing trust and a reputation for long-term ESG focus must ensure sustainability is built into their reporting processes – systemically, strategically and rigorously. Only then will we see investor skepticism in the region subsiding and businesses being recognized for their efforts to become more sustainable.