As Companies Disclose More ESG Information, External Assurance Can Help

by Wes Bricker

As investors and regulators demand more transparency around ESG issues, what and how companies disclose ESG data is critical to meet market needs and build trust with stakeholders.

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Today, more companies are implementing ESG initiatives and reporting efforts to meet rising demands from investors and other stakeholders who are increasingly using ESG data to inform investment decisions. Now more than ever, companies need to demonstrate that their purpose is not just words, but actions that benefit all of their stakeholders.

Most business leaders understand what’s at stake. In PwC’s recent Consumer Intelligence Series, 92% of business respondents agree that companies with commitments to ESG policies will outlast competitors without. However, 37% also cited the lack of reporting standards and regulations as one of the top barriers to ESG progress. As investors and regulators demand more transparency around ESG issues, what and how companies disclose ESG data is critical to meet market needs and build trust with stakeholders.

Assurance for ESG disclosures

The SEC recently issued a request for input on climate change disclosures, the first step in potentially developing standardized reporting processes for climate change, among other future ESG issues. This would provide clear guidance for companies by eliminating the guesswork in determining what and where to disclose climate and other ESG information.

New requirements should be subject to independent third-party assurance, similar to financial disclosures. Independent assurance would provide investors with additional confidence in the quality of ESG information and enhance its credibility. After all, investors and other stakeholders are entitled to the same confidence in climate information as they currently expect from financial disclosures.

In addition, a business’s financial auditor already understands the company’s operations, systems, processes and reports, as well as the roles and responsibilities of employees. As a result, the external auditors’ existing knowledge could inform the scope and approach for assurance over climate change information and provide context for the findings.

Like financial information, ESG data may be material to a company and its long term value proposition. Requiring reasonable assurance from external auditors adds another level of quality to ensure consistent, high-quality data that investors can use to inform decisions and company leaders can leverage to build their business strategy. Since CFOs often “own” ESG reporting, it provides financial leaders with the ability to combine financial and nonfinancial information to better tell their story.

Why ESG reporting matters

As more companies make ESG-focused commitments, especially net zero commitments, these strategies require milestones, and a strong focus on ESG reporting can help companies understand where they are, track progress against goals and communicate with stakeholders. This level of transparency and credibility will no doubt help build trust with stakeholders by demonstrating that the company is a good corporate steward.

In addition, ESG is critical for capturing opportunity and keeping ahead of vulnerability. After all, you can’t manage what you can’t measure, and consistent ESG reporting allows companies to understand what’s working and identify opportunities for improvement. Many areas within ESG, if not addressed, can expose a company to risks across the environmental, social and governance spectrum. Having access to accurate, updated ESG data allows business leaders to make more informed decisions impacting the business strategy and other initiatives.

And embracing ESG initiatives shouldn’t be done simply to tick a regulatory box, but to create sustainable advantage and value for the organization. While ESG initiatives are useful to a company’s stakeholders, its community and our broader society, leaders understand that it’s also good for the business’s bottom line.

Wes Bricker is PwC’s US Vice Chair and Trust Solutions Co-Leader.