ESG reporting should shape not hinder business strategy, say experts

Pinsent Masons’ James Dunham, who advises on climate risk and sustainable finance, and Anne-Marie Friel, who advises businesses in the infrastructure sector also for Pinsent Masons, were commenting after the findings of a recent survey suggested many boardroom executives at some of the UK’s largest public companies consider the time taken to meet reporting requirements hinders strategic discussions.

The FTSE 350 Boardroom Bellwether is an annual survey undertaken by the Financial Times and The Chartered Governance Institute UK & Ireland. In this year’s survey, boardroom executives at FTSE 350 companies were asked whether increasing reporting requirements are reducing the time available for strategic discussions at board level – 81% of the respondents said they are, at least to some extent.

In recent years, corporate reporting in the UK has expanded beyond traditional financial reporting to reflect the introduction of regulations on gender pay gap reporting and the reporting of climate-related risks and opportunities, among other things. New sustainability reporting and nature-related disclosure requirements are expected to follow in due course, while there has been debate over whether new ethnic pay gap reporting requirements should also be introduced – the UK government has issued guidance to help support businesses to voluntarily report their ethnic pay gap, but the Bellwether survey found that just 19% of FTSE 350 companies have adopted this approach.

The increasing ESG-related reporting and disclosure requirements were addressed specifically in questions posed in the Bellwether survey. Two-thirds of respondents said complying with those requirements is fairly difficult, while a further 15% said compliance was very difficult. None said meeting the reporting obligations is very easy. Almost a third (30%) of FTSE 350 companies seek greater clarity and consistency on climate and sustainability reporting via regulation, and the survey also found an equal split between FTSE 350 businesses who consider themselves prepared for reporting nature-related risks and opportunities and meeting increasing demands on preserving biodiversity, and those that do not.

Dunham said: “A company’s response to climate-related disclosure requirements should be complementary to board level strategic discussions. For example, the Taskforce on Climate-related Financial Disclosures (TCFD) framework was designed to provide information to stakeholders relating to how climate-related risks and opportunities are likely to impact an organisation’s current and future financial position.”

“There is a growing body of evidence – see research initiated by the Global Alliance for Banking Value and analysis by MSCI, for example – that climate and sustainability performance, and financial performance, are intrinsically linked,” he said.

According to Dunham, companies that prioritise climate considerations in their operations, strategic planning and decision-making are more likely to experience positive financial outcomes over the long term. This is because they are better equipped to identify and manage material risks and opportunities, as action drives innovation and adaptation; navigate the ever evolving and increasingly stringent maelstrom of sustainability regulations, international standards and stakeholder expectations; and because customers and investors are also increasingly drawn to organisations that can demonstrate strong sustainability credentials.

Dunham said: “Integrating climate considerations into operational policies, processes and procedures can meaningfully reduce the reporting burden while enhancing the climate and financial outcomes. It is, however, important to also recognise the significant initial upfront cost required to establish these in-house reporting frameworks.”

Friel said: “In infrastructure, we are finding that the benefits of integrating climate risk and opportunities into organisational strategy go beyond raising capital and includes the ability to win contracts and reduce operational carbon in practice. The use of standardised reporting frameworks is an essential tool to cut through the significant noise on climate change and enable your clients, customers and investors to assess whether or not you really get it, compared to your peers.”

Climate change is rated third among the major factors that FTSE 350 companies see as contributing to increasing risk facing their businesses, behind cyber risk and global economic risks.