The Three Trends Shaping ESG Reporting in Finance in 2022

The finance sector has been watching environmental, social and governance (ESG) issues for years, particularly the gradual progress towards higher expectations from stakeholders and the general public, as well as more defined regulations and standards coming from governments and regulatory bodies.

In 2021, the focus on ESG accelerated. This year, as businesses continue to rebuild from the pandemic – with some having to create entirely new supply processes – the financial industry will see significant change with a deeper focus on ESG resilience, strategies, reporting and governance. In particular, three key trends will shape the finance sector's approach to ESG reporting in 2022.

More confidence in ESG credentials

Historically, employees, customers, investors, and other stakeholders have been cynical about corporate reports on sustainability and corporate social responsibility issues. There is still a lack of trust regarding organizations' ESG claims and a perception that companies are guilty of greenwashing or only reporting on positive progress. This is frustrating for organizations that not only understand the value of reporting accurate ESG metrics but also invest significant time to do so.

For many organizations, it isn't entirely clear what they need to do to build that trust. Until ESG is standardized and everyone is on a level playing field, organizations need to establish how they can provide greater consistency and transparency of ESG data. Key to this is working with investors to understand what it is they want to see.

Companies recognize that strong relationships with their stakeholders will only be possible if they can demonstrate that they are reporting consistent, trustworthy data. With audit-ready reports based on a single source of truth, they can establish more confidence with their stakeholders.

Regulations that seek to mandate greater trust, transparency and accountability are on the horizon. This is one reason why stakeholders are beginning to feel that they can have more trust in the ESG data included within a company's reports. For example, many organizations across Europe are currently issuing their first European Single Electronic Format (ESEF) filing, in line with a mandate that aims to make reports more easily discoverable and comparable with standardized tagging.

Additional regulatory changes are coming into force such as the Corporate Sustainability Reporting Directive (CSRD) which will create more standardization – and confidence – in the reporting of corporate ESG progress. Inevitably, more regulatory changes are yet to be revealed but organizations don't need to wait for regulatory bodies and standards setters to set the pace of change within their businesses. Trust can be built now.

Companies will need to go further when sharing data, both to meet these regulatory requirements and to cater to stakeholder demands. For example, outlining the company's gender and diversity split no longer satisfies investors. They are also interested in how executive pay links to sustainability goals. Pay gaps need to be reported on and taken into account alongside, for instance, seniority and length of time at the company.

Organizations will also need to ensure that processes are in place to gather this data efficiently from siloed departments across the business. One way to address this is to use one centralized platform that integrates teams, processes, and workflows to make this complicated data gathering exercise simpler. With this type of technology, all data within the platform can be linked. When data is updated in one place, it automatically updates everywhere. This means reporting teams can be confident in the consistency of the data, and stakeholders can be confident in the ESG credentials being reported.

As organizations get into their stride with streamlining ESG reporting processes this year, banks and investors can expect more confidence in the ESG data that companies publish.

A collaborative approach to ESG reporting

As regulation is changing, the ESG data that companies need to track and report on is also shifting. Annual and interim reports can be a mammoth task, involving many stakeholders across multiple disconnected teams — from the sustainability and corporate communications teams to investor relations, auditors and more. So there is a growing need for businesses to ensure that everyone involved in developing ESG reports not only buys into a collaborative, centralized reporting model but understands their role in it.

This requires education across teams. Once an organization has identified who needs to be involved, those individuals will need access to the right reporting tools and, importantly, clear and consistent lines of communication. Efficient ESG reporting requires everyone to know the role they play and collaborate.

Critically, everyone around the boardroom table — whether an ESG leader or not — has a key role to play. The CFO in particular needs to ensure that all teams become part of the process. This is where groups such as the UN Global Compact CFO Taskforce come into their own. This task force was set up to guide companies in aligning their sustainability commitments with credible corporate finance strategies – enabling advice and idea-sharing between CFOs for peer-to-peer support.

Collaboration is key and establishing a circle of trust optimizes the reporting process. Without this, organizations are more likely to continue to face challenges with ESG reporting and may struggle to gain stakeholders' trust. This year, organizations will need to establish a clear system of ESG reporting roles to ensure those processes can be streamlined for efficient, consistent, and trustworthy ESG reporting.

Continued standardization of ESG and tighter regulations

Change is a constant when it comes to the demands put on the annual reporting process. For example, the CSRD proposed by the European Commission last year aims to enhance and strengthen the measures already in place under the Non-Financial Reporting Directive (NFRD) and is, in part, the result of a series of consultations that started as far back as 2018. This year, financial firms will also need to start preparing for the UK Financial Conduct Authority's mandatory climate-related disclosure rules which are due to come into force by 2025.

As a further change to the ESG reporting landscape, the International Sustainability Standards Board (ISSB) – announced at COP26 – will provide consistent standards for organizations across the world, significantly reduce cross-framework mapping, and simplify some of the more painful elements of the reporting process. The ISSB will be pivotal to meeting demands from investors for transparent, reliable and comparable reporting by companies on climate and other sustainability-related matters.

The move towards greater standardization, control and rigor is being driven by the need for greater transparency. This transparency fosters trust in data, and this is vital considering that ESG is now a critical business success factor.

The demand for businesses to improve the quality of the ESG information that they share with investors and the market will continue. If a company is to stay on top of the evolving regulatory requirements and ensure that it can deliver consistent, transparent reports, it will need to future-proof annual reporting processes. Bolting on solutions to a reporting framework may seem like the quick answer but it won't deliver the sustainable, long-term value required. It will only cause delays, inefficiencies, and endemic long-term disruption. Organizations are recognizing this, so we can expect to see the need to future-proof annual reporting processes become more of a priority in 2022.

ESG has moved swiftly to the top of companies' priority lists. The driving forces behind the acceleration are clear; lenders expect greater visibility, new regulation is coming into force, and both customers and employees are increasingly values-driven. As organizations double down on tracking and publishing data that demonstrates their ESG prowess and progress, the trends above will shape their approach to streamlining the processes which make that reporting possible.

This article was written by workiva from 3BL Blogs and was legally licensed through the Industry Dive Content Marketplace . Please direct all licensing questions to legal@industrydive.com.