Environmental, social, and governance (ESG) concerns continue to rise up the corporate agenda, as stakeholders demand that business strategy aligns with sustainability commitments. Sustainability reporting and disclosure is being taken more seriously than ever before, so Future looks at Deloitte’s assessment of ESG readiness and how it is changing.
Sustainability is permeating every aspect of business activity, but all too often it is thought of purely in terms of a company’s environmental impact. In fact, environmental, social, and governance (ESG) issues all contribute to a firm’s sustainability credentials, and the wave of regulations demanding more transparent and in-depth reporting on all those factors has made that clear to companies of all sizes and in all sectors.
The latest Sustainability Action Report from Deloitte, which takes a detailed look at ESG disclosure and preparedness, found that ESG is increasingly about business fundamentals for many companies. For instance, its latest survey data shows that 89% of executives are proactively making strides to hold themselves more accountable and drive trust with their stakeholders in an effort to better position themselves to thrive and differentiate over the long term.
The survey, published in December 2022, showed that 57% of companies have established a cross-functional working group to bring together senior people in finance, accounting, risk, legal, sustainability and other business divisions to drive strategic attention around ESG. This is a huge increase from the 21% that was reported just six months earlier.
Walking the walk
In previous years, many organizations seemed to be merely paying lip service to the values that underpin ESG. Greenwashing was a big trend at one point, but then came a period when commitment became much more serious. Now, that commitment seems to be turning into concrete action.
Regulatory reporting requirements continue to play a major role in pushing this trend forward. US companies, for example, are starting to prepare for the disclosure requirements proposed earlier in 2022 by the Securities and Exchange Commission (SEC), and in Europe a comprehensive set of reporting standards for Scope 1, Scope 2 and Scope 3 emissions reporting is coming into force.
For many companies, these requirements are positioning ESG reporting as the primary method for assessing, organizing, and reporting their current and planned sustainability initiatives. They recognize that ESG readiness and external assurance are valuable tools that can have a significant impact on a company’s governance and reporting processes and controls.
With this in mind, many organizations are making great efforts to ensure that the reporting process is handled with the utmost accuracy and diligence. In fact, Deloitte found that virtually all (96%) of executives are planning to seek external assurance for the next reporting cycle – 61% have already done and 35% are about to do so for the first time.
Tools, time, and transparency
There is undoubtedly an unprecedented appetite for optimizing ESG reporting, and companies are actively working to meet the growing need for high-quality ESG performance metrics. This is not, however, a straightforward task.
Some areas of reporting are considerably more challenging than others. Particularly for large companies, calculating Scope 3 greenhouse gas (GHG) emissions – emissions that are not produced by the company itself, and are not the result of activities from assets it owns or controls, but for which it is indirectly responsible up and down its value chain – is particularly difficult.
There is undoubtedly an unprecedented appetite for optimizing ESG reporting, and companies are actively working to meet the growing need for high-quality ESG performance metrics
An overwhelming majority of respondents (86%) in Deloitte’s survey reported challenges measuring Scope 3 GHG emissions, noting that access to specialist resources and more consistent industry standards would help them address that challenge. Only a very small percentage (14%) of respondents said that they faced no challenges.
Some 35% of executives surveyed reported that their greatest difficulty is achieving the necessary accuracy and completeness of data. A further 25% picked out access to quality data as their biggest challenge. In an effort to overcome these challenges, 99% of companies are somewhat or very likely to invest in more technologies and tools over the next 12 months.
Significantly, those companies that seek external assurance for ESG data – principally the larger companies in the survey – were revealed to be more likely (40%) to cite challenges with data quality than companies that are seeking to obtain external assurance for the first time (27%).
When these various challenges are overcome, access to timely and higher-quality data, as well as greater discipline and ESG preparedness, can help unlock transformation and value-creation opportunities. The insight gained from ESG reporting can, in fact, drive strategic choices that can go a long way to addressing enhanced stakeholder expectations.
Reaping the benefits
Such is the importance of integrating ESG reporting into business strategy that larger companies are creating the new role of chief sustainability officer (CSO), rather than relying on the CFO to take charge as is the case in smaller companies. Whoever is in charge, their job is to not only ensure compliance with reporting standards, but also to secure the many benefits that can accrue.
In Deloitte’s survey, respondents chose their top three expected outcomes, with talent attraction and retention (52%), gains in efficiencies (52%) and enhanced trust with stakeholders (51%) coming out on top. Not far behind, however, were elevated brand reputation (49%), risk reduction (48%), and premium pricing – pricing products higher than comparable brands – (48%).
In Deloitte’s survey, respondents chose their top three expected outcomes, with talent attraction and retention (52%), gains in efficiencies (52%) and enhanced trust with stakeholders (51%) coming out on top
Looking at combinations of selected outcomes, 19% ranked both increased efficiencies and return on investment (ROI) within their top three, while 17% ranked increased efficiencies, premium pricing of products, and ROI as their top three outcomes.
Notably, attracting talent and employee retention was the top anticipated benefit (58%) in the life sciences and healthcare industry. Greater trust with stakeholders (58%) and premium pricing of products (58%) led the way for the oil and gas industry. Increased efficiencies, and improved ROI (58%) is the biggest benefit in the consumer products industry.
The data from Deloitte clearly shows that sustainability is not a box-ticking compliance exercise but a business opportunity for both large and small organizations. As climate change brings more risk and uncertainty, a strong focus on ESG will play a growing role in risk reduction and long-term execution on strategy.
To download a copy of the Deloitte report, visit:
Deloitte commissioned an online survey in August and September 2022 of 300 executives at publicly owned companies with a minimum annual revenue requirement of $500 million or more, as well as conducted interviews to increase the total sample size to 100 in each of the following industries: consumer products; financial services; life sciences and health care; oil and gas; and TMT (technology, media and telecommunications). Executives are defined as senior finance, accounting, sustainability, and legal executives with a minimum seniority of director, or chief risk officers, general counsels, chief legal officers, or chief sustainability officers.