Nearly half of CFOs admit to flawed ESG reporting: EY

By Jim Tyson for CFODive.com

• Two out of five CFOs (41%) admit that their reports on environmental, social and governance (ESG) performance fall short of basic assurance standards, and a “significant percentage” say they fail to provide investors with “relevant” information, EY said, citing its Global Corporate Reporting Survey.

• Nearly all institutional investors (99%) see ESG reports as crucial to decision making, but 76% believe companies “cherry pick” what they disclose and 88% say companies only report under regulatory pressure, EY said, describing findings from a global survey of 1,040 CFOs and 320 institutional investors.

• “Businesses that are serious about securing trust and a reputation for long-term focus must ensure that sustainability is built into their reporting processes — systematically, strategically and rigorously,” according to Tim Gordon, leader of EY’s Global Financial Accounting Advisory Services.

The Securities and Exchange Commission (SEC) released a proposed rule in March requiring publicly traded companies to provide detailed disclosures on carbon emissions and climate risk.

The SEC aims to mandate that companies describe on Form 10-K their strategy toward climate risk, including plans to achieve any targets they have set for curbing such risk.

Companies would also need to disclose data on their greenhouse gas emissions, either from their facilities or through their energy purchases, and obtain independent attestation of their data.

Under a regime of uniform climate risk reporting, businesses would gain detailed insights into potential costs and opportunities and investors will be able to better gauge risks at specific companies and compare risk levels across industries, according to SEC Chair Gary Gensler.

“Companies and investors are at odds when it comes to sustainability,” EY said. The “clash of opinion threatens to stifle access to capital for many organizations and could hinder progress on decarbonization.”

Nearly four out of five (78%) of institutional investors say that companies should invest in improving their ESG performance even if it sets back profits, EY said. Only 55% of CFOs agree.

Four out of five investors said that businesses often fail to explain the rationale for long-term investments in sustainability, complicating efforts at evaluation, EY said.

“Businesses and the investors they rely on still have very different goals and expectations in relation to sustainability,” Matthew Bell, EY’s global climate change and sustainability services leader said in a statement. Company efforts to promote sustainability “can only hit home if they are seen as credible.”

The proportion of institutional investors who said they take a rigorous, structured approach to assessing ESG performance rose to 74% this year from 32% in 2018, EY said.

“Investors feel strongly that they do not get the reporting and data-driven insight they require to inform their investment decision-making and how they evaluate a company’s growth and risk profile,” according to EY.

Seventy-three percent of investors said “organizations have largely failed to create more enhanced reporting, encompassing both financial and ESG disclosures, which is critical in our decision-making,” EY said.