Sustainable reporting is like top-level sport
If you’re fit, you’re in good shape to perform to your best. This calls for training and good preparation, but, for companies today, getting fit and staying fit in the world of ESG reporting and insights is essential. ‘The days of taking a rough-and-ready approach to reporting non-financial data are over’, says Willem-Jan Dubois, transformation specialist within PwC’s ESG team. ‘Both the quality and volume of ESG metrics are increasing at a rapid pace’, explains Alexander Spek, accountant and expert in the field of sustainable reporting. In the final article in this three-part series, we turn our attention to the future.
Three-part series on sustainable reporting
As a business you are bombarded with all kinds of sporting metaphors: companies need to get fit; companies need to train; companies need to prepare for a marathon without a finish line. Making yourself ‘fit for the future’ is the goal. But how do you do that?
‘To be ready for the future in the area of sustainable reporting, everything has to be right’, says Willem-Jan Dubois. ‘As a first step, we determine the right direction together by thinking about strategy, complying with legislation and choosing the right KPIs. We then focus on achieving transparency by designing the ESG reporting, systems and data architecture in a robust way.’
Next, it is essential to build on all the preparatory work you have done so far and go into greater depth. The processes, systems and controls serve as a foundation, but without the right people you’ll get nowhere. ‘Suppose you suddenly have to start working on carbon accounting. That means you’ll need knowledge and expertise to understand what non-financial information is all about’, says Alexander Spek. In other words, a future-proof organisation must take steps in the area of recruitment and also to prepare its existing staff – both in the finance department and in many other departments within the company.
'To be ready for the future in the area of sustainable reporting, everything has to be right.'
Auditor’s seal of approval
None of the sustainable information that is currently reported on – from carbon emissions to diversity and from kilograms of waste to water consumption – is subject to an audit process. No auditor audits sustainable books on the basis of a legal obligation. ‘Many companies still have a rather rough-and-ready sustainable reporting system’, says Dubois. ‘And that will not be an option for much longer’, Spek adds, ‘because the need for such reporting is increasing, as are the required quality, volume and frequency. The time has come to take a structural approach to sustainable reporting.’
Five years ago, non-financial information was a ‘nice to have’. There was hardly any legislation and for stakeholders such as investors or lenders it was not particularly interesting. This has changed rapidly in recent years, creating an expectation about the information you as a company share with the outside world. Dubois: ‘Companies now set ESG targets, bonuses are influenced by them and management is judged on them. That means the relevance of this information has increased.’
As soon as the relevance of information increases, and as soon as companies are guided by that information and stakeholders make decisions based on reported data, the data in question has to be reliable. ‘Data must be collected promptly, be consistent, be presented comprehensibly and be of good quality. That is not always the case at present’, says Spek on the subject of data reliability. In addition, the sustainable information that companies report today is not subject to verification by an auditor, for example. ‘Not yet, at least’, stresses Spek. ‘Soon auditors will be auditing these books too. It’s just a matter of time.’
Why it is essential to get fit for the future and act now
- Relevance of ESG information is increasing – From ‘nice to have’ to ‘need to have’: today, reporting sustainable information is no longer a choice. This is strategic information that influences lenders, investors and stakeholders.
- Volume of ESG data points is increasing – The number of non-financial data points that companies have to report on is growing. This calls for a different form of organisation and the design of processes and systems.
- The frequency of reporting is increasing – Not only are more non-financial data points being reported on, but this reporting is also becoming more frequent. More and more stakeholders, both internal and external, need a real-time insight into this data.
- Quality requirements are increasing – The more relevant the information, the higher the expected quality of the data. This calls for an audit process and a robust set-up.
Obtaining reliable information
But how do you obtain reliable information? It must be absolutely clear who is responsible for which aspect within the information chain. Who takes what step? Who collects the data and who processes it? And, just as importantly, who audits the data? Next, it is essential that information is recorded properly and accessibly. You need to record the information in such a way that a controller can be guided by it – for example, using standardised periods that allow relationships to be established between certain data points. That is not nearly as easy as it may sound.
Let’s take an example from the category of circularity: waste. Suppose the law requires every company to record the waste it generates – material that is thrown away and thus leaves the company – in kilograms. To report on a single data point, a whole process must be put in place. This process includes recording the waste stream promptly, determining the different categories of waste, establishing a timeline, assigning people to report and assigning people to audit the data. And that’s not all. After all, in what system will this data be recorded and aggregated? How does it get to the finance department in the right way to make reporting possible? And how is the interaction organised between the person responsible for reporting and the person responsible for actually reducing the volume of waste?
Staying focused, today and tomorrow
These days, resting on your laurels is no longer an option. Putting everything in place today to meet tomorrow’s requirements is fine, but what if the rules change the day after tomorrow? ‘Now we are talking about really being future-proof. This requires a well-designed process with the right mechanisms built into it’, says Dubois. These mechanisms should do their job if legislation changes or a company adjusts its strategy or decides to make an acquisition. ‘It must be possible to translate these events directly into both internal and external reporting. That’s what I refer to as governance around changing requirements and, as far as I’m concerned, it’s the essence of future-proofing.’
According to Spek, the processes involved in sustainable reporting may have to be even better than those used in traditional, financial accounting. ‘In financial accounting, there is always a balance due to the double-entry bookkeeping system. That basis provides certainty and enforces a certain logic. Errors are easier to detect, for example, because connections are more visible. Such connections are much harder to make in non-financial accounting, which means it’s less easy to see why something is wrong.’
This demands constant focus and attention. ‘In the future, non-financial information will be just as important as financial information’, conclude Dubois and Spek. ‘That’s the future that you, as a company, must prepare yourself for now. Time is pressing, as in 2025 all companies will be required to report on a large number of sustainability targets. Being fit means meeting those requirements: the requirements imposed by the legislator and auditors, as well as by stakeholders.’
'In 2025 all companies will be required to report on a large number of sustainability targets. Being fit means meeting those requirements: the requirements imposed by the legislator and auditors, as well as by stakeholders.’
How PwC can help with ESG reporting
Our ESG Reporting & Insights model – choosing the right KPIs, creating transparency and becoming fit for the future – helps companies at every step and in every stage as they move towards a sustainable business model.
Together, we set the right direction by thinking about strategy and compliance with legislation. This means that we first define the ESG principles, formulate a strategy and set challenging ambitions. Once we have determined the starting point, we focus on achieving transparency. We do this by making the ESG reporting, systems and data architecture robust. An important step in this phase is choosing the right KPIs, as discussed in the first article in this three-part series on ESG Reporting & Insights.
In addition, it is essential for every stakeholder that there is transparency and that ESG is fully integrated into the organisation. In this second phase of our work, we focus specifically on the requirements of credit rating agencies, external reporting and setting the right tone at the top in the area of ESG strategy. In the second article in our three-part series on sustainable reporting you can read more about the five conditions to achieve a transparent ESG future.
In the final phase we focus on making your organisation future-proof. We do this by putting systems and control mechanisms in place, for example. We help to draw up a list of ESG initiatives, monitor progress, make adjustments based on your ESG ambitions and strategy, give your data systems greater depth, stimulate good partnerships and ‘upscale’ all employees. In the above article, the last in our three-part series on sustainable reporting, you can read all about getting fit for the future.
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