References

1. yougov.co.uk

2. investopedia.com

3. ft.com

4. independent.co.uk

5. environment.ec.europa.eu

• What is net-zero and why is it important?
• How to approach setting a net-zero target (baseline carbon footprinting and understanding)
• Ensuring your target is robust, ambitious and in line with the science on climate change
• Integrating and communicating your net-zero target

We are living on borrowed resources

As things stand, we are utilising resources that do not belong to us. As of today, 19 May 2023, we have consumed all the UK can regenerate in a year. This comes when we are only 138 days through the year, with just under two-thirds remaining. Today is our Overshoot Day.

The UK has a biocapacity per capita of 0.56 gha/person, whilst the average UK resident has the 9^th highest ecological footprint in the world, equalling 7.93 gha/person. We overconsume the Earth’s resources at a rate of 7.37 gha/person, a rate that the UK biocapacity cannot regenerate at – to achieve this, we would need 4.1 UK’s. But this does not just affect the UK, if every person in the world was to live like UK residents, we would need 2.6 Earths worth of resources.

The UK economy is heavily reliant on its resources, with the utilised agricultural area (UAA) totalling 17.6 million hectares in 2022, accounting for around 71% of the total land size. Whilst the use of natural resources for the purposes of agriculture only equates to 0.68% of the UK’s GDP, the larger sectors such as manufacturing and services are also at risk. Analysis conducted by Natural Capital Finance Alliance using ENCORE shows that there is potential high dependency on natural capital over 74% of the FTSE All-Share index sectors.

How can we solve this?

To reach a sustainable level of consumption by the year 2050, we would need to shift the date back 8 days per annum to achieve an Earth Overshoot Day of 31 December 2050. But how can you as a business help to do this?

Humanity’s ecological footprint is predominantly composed of carbon emissions, which account for 60% of our overall impact on the planet. Decarbonisation represents the most effective strategy for restoring balance between our ecological footprint and the planet’s renewable resources whilst simultaneously mitigating climate change. If we manage to cut down the carbon emissions that contribute to humanity’s ecological footprint by 50%, it would shift the UK’s Earth Overshoot Day by over three months, or 93 days.

By implementing readily available and commercially viable energy-efficiency technologies in buildings, industrial processes and electricity production, we could shift Overshoot Day by a minimum of 21 days, without compromising on productivity or comfort.

Addressing the ecological debt crisis is not a task that can be accomplished overnight. Fortunately, viable solutions are already available and have been effectively implemented. The need of the hour is to swiftly scale up their implementation.

For how we can support your business in its decarbonisation, see our carbon services or request a call-back.

Author: Harry Freeman, Consultant

#MoveTheDate
www.overshootday.org

The European Commission is influencing business behaviour through the Sustainable Finance Agenda. UK and US companies will be affected by the ESG reporting regulations if they have subsidiaries in Europe.   

US companies not only need to prepare themselves for the proposed Securities and Exchange Commission¹ (SEC) Environmental, Social and Governance (ESG) reporting disclosures but should also ensure they are readying themselves for the impact of the international ESG reporting requirements such as the Corporate Sustainability Reporting Directive² (CSRD).

Within the EU, CSRD is expected to impact nearly 50,000 entities. This is far more than are affected under the current EU reporting requirements. CSRD, which entered into force on 5 January 2023, requires all large companies and all listed companies (except listed micro-enterprises) to disclose information on their risks and opportunities arising from social and environmental issues and on the impacts of their activities on people and the environment.

EU subsidiaries of UK and US companies will be expected to provide substantial ESG disclosures, demonstrating the robustness of their ESG strategy, targets, KPIs and progress, as well as the ESG performance of their products/services and value chain.

One of the requirements of CSRD is to complete a double materiality assessment to determine the priority topics for a company’s ESG strategy and reporting. This type of assessment involves stakeholder mapping and engagement, determining the impact of ESG on the organisation and the impact the company has on the ESG topic. In addition, the financial impact of ESG is also considered.

Climate change is a good example of this inside-out approach, where the impact of climate change on the company is assessed, for example flooding and supply chain disruption. The company would also need to consider their contribution to climate change e.g. use of fossil fuels, production of single-use plastic, use of their products and advice provided to clients.

CSRD also imposes mandatory assurance for reported sustainability information. This is likely to be conducted by a company’s financial auditors if they have the correct skills and experience.

The first set of companies under the scope will have to apply the standards in the fiscal year 2024, with reports published in 2025.

Next steps

Given the short timescales, we would recommend conducting a double materiality assessment urgently and, in the meantime, reviewing current ESG strategy, targets and KPIs against CSRD requirements and wider international reporting requirements. We would also recommend reviewing the current system in place to track ESG data and ensure data is being tracked robustly at a subsidiary level.

Author: Nicola Stopps, CEO, Simply Sustainable

1. Securities and Exchange Commission. sec.gov
2. Corporate Sustainability Reporting Directive. europa.eu

Today, it is now widely acknowledged that companies cannot tackle the climate and nature crises without bold action. The arrival and ongoing development of corporate science-based targets (those in line with the ambition to keep global temperature increase below 2°C and ideally to 1.5°C above pre-industrial temperatures) has crucially set the minimum standard for climate action. Despite this, a significant quantity of greenhouse gas emissions still remain outside of companies value chains, presenting the need for companies to drive net-zero beyond the company boundary.

At Simply Sustainable, we help companies to deliver socially inclusive decarbonisation actions, mitigation measures and investments to avoid, reduce and then remove greenhouse gases that fall outside of the company’s direct value chain. This is referred to as ‘beyond value chain mitigation’. Importantly, such actions play a key role in reducing the emissions gap between today and our global net-zero target date of 2050.

At present however, there is an absence of clear industry guidance on beyond value chain mitigation. The SBTi (Science Based Targets initiative) for instance, is anticipated to release further guidance in 2023 whilst sector specific methodologies are underway. In the meantime, companies must pursue credible mitigation efforts to ensure a chance of achieving global net-zero in-line with the Paris Agreement.

To deliver credible beyond value chain mitigation, companies must consider near-term and long-term targets, align to the wider company strategy and values, and consider innovation and knowledge gaps in the achievement of net-zero. Additionally, such measures should be monitored and reported at least annually with minimum expectations to disclose the nature and scale of involvement, monetary contribution and value realised.

Here’s just a few examples of how we can support beyond value chain mitigation for your company:

• Delivering credible, socially inclusive net-zero strategies (with beyond value chain mitigation)
• Conducting just transition assessments to understand opportunity areas for socially inclusive partnerships to deliver net-zero
• Advisory on carbon offsetting and the purchase of high-quality, jurisdictional carbon credits (including nature-based solutions)
• Driving climate finance by setting an internal price of carbon and calculating the social cost of carbon of your business
• Developing research and development plans and opportunity metrics and targets for new climate solutions
• Assessing and improving climate skills, training and education to deliver decent and green jobs, education, skills, training and re-training for all.

By considering beyond value chain mitigation with foundational principles of social inclusion, fairness and equity, we can support companies to ensure no one is left behind as we strive towards net-zero. Ultimately, we can and must work together to collaborate and partner to deliver co-benefits for nature and people.

Fair tax systems are vital to enhancing public trust and to achieve a modern, sustainable and inclusive economy. Currently, the world is focused on the environmental and social consequences of what businesses do and are calling organisations to respond in a way that demonstrates positive impact. Tax reporting is an area that brings elements of environmental, social and governance (ESG) performance to life, with leaders preparing for a more transparent tax world. Tax transparency is a topic that has seen rapid change in recent years and recent scandals have highlighted the need to retain public and stakeholder trust. Simply Sustainable have a strong focus on addressing the most complex issues and opportunities our clients face. By combining our expertise and commercial mindset, we work to achieve your business goals.

Simply put, to stay competitive in the market, businesses must respond to the increased focused on tax strategies, policies, reporting and risk management in connection with responsible investment. Our approach is underpinned by these four principles:

Good governance

It is important to know that tax lies within both ‘S’ and ‘G’ of ESG. So, what is the most effective way the tax function of a company be managed and governed that upholds social and moral values?

Corporate tax is becoming a reputational risk that companies must consider and is a means for stakeholders to evaluate if companies are paying their ‘fair share.’ This impact is seen on a local and international scale, with “unfair tax” depriving the low and medium Human Development Index countries of an estimated $100 billion per year.³ To follow through with good governance, a company must follow the general business and human rights logic and hold social and economic rights as a key obligation to operations. This means putting in place the right policies and processes to assess the impact of a company’s behaviours and minimise the potential harm done by irresponsible tax behaviour. These should all be measured for effective due diligence and robust impact assessments.

Transparency

Taking a responsible approach to tax means that a company is open, progressive and considers all stakeholder interests – including taxpayers, communities, governments, lenders and the financial community.¹ So, understanding tax from a social perspective means questioning how much tax is being paid and where, and what are the global tax strategies being undertaken by companies?

While pressure in different geographical regions varies, the consensus from the global stakeholder community is for companies to reflect on their contribution to society. Voluntary approaches included engaging with disclosures in Global Reporting Initiative (GRI)⁴, Fair Tax Mark accreditation, B Corp certification and the work done by Principles for Responsible Investment (PRI) such as the Engagement Guidance on Corporate Tax Responsibility and Investors’ Recommendations on Corporate Income Tax Disclosure.⁵

Companies will already be aware of mandatory requirements in certain regions and sectors. These include country by country reporting (CBCR) in the EU Accounting Directive, public country-by-country reporting (pCBCR) Directive, UK Tax Strategy Disclosures and Base Erosion and Profit Shifting Project (BEPS) for certain OECD countries.

Engagement with Tax Authorities

Even if a certain regions tax regulations are unchanging, a company may still be subject to stringent regulation by tax authorities. Tax authorities are taking a more proactive enforcement to reduce the exploitation of international tax frameworks. Need for transparency and better disclosure has been the focus for global bodies such as the World Federation of Exchanges – include tax transparency as ‘material ESG metric for reporting’; International Accounting Standards Board (IASB), International Financial Reporting Standards (IFRS) Foundation – work on independent standard-setting on tax disclosures; and the International Federation of Accountants (IFAC).⁵

 Tax risk management

Tax-related risks extend beyond short-term earnings, so companies should be proactive to changes in their business environments to tax rules. This may include being aware of incentives the company may take advantage of, reputational and brand risk, societal risk from aggressive tax strategies and challenging complex strategies. In addition, a company should understand the potential impact on key stakeholders to understand any long-term risks.

How Simply Sustainable can assist

Many recommendations from all actor groups share the same difficulty: how to distinguish between acceptable and unacceptable tax practices. To address this, Simply Sustainable follow the above four principles to develop an approach for our clients that embraces responsible tax. Our goal is to arrive at the correct tax metrics to support the overall ESG goals to achieve commercial success and wider stakeholder buy-in.

¹ B Team. Why responsible tax belongs on the ESG agenda.

² Fair Tax. About us.

³ Oxfam. Endless corporate tax scandals.

⁴ GRI 207. Tax 2019.

⁵ PRI. Advancing tax transparency: outcomes from the PRI collaborative engagement.

Greenwashing in the financial sector risks devaluing ESG, but there are three things that could help firms raise the bar; upskilling, target-setting and better reporting.

As Simply Sustainable is a technically experienced consultancy and having worked across financial services clients including banks, private equity portfolio companies and funds, we understand where improvements need to be made.

“In the finance sector, the level of awareness, knowledge and then implementation [of ESG criteria] has risen quickly and dramatically but there is still a journey to continue. What I’ve seen work well is the understanding of the financial risk of ESG and particularly climate change on businesses,” says Nicola Stopps CEO of Simply Sustainable.

The Taskforce on Climate-Related Financial Disclosures legislation coming in has been useful because this framework has helped improve knowledge of the risks of climate change and, by extension, other ESG topics too. Investment firms are “at the table on ESG”, asking the difficult questions of companies and setting the tone for the businesses in which they invest, forcing them to take ESG seriously.

What else can financial services do to make their businesses and those in which they invest, do better on ESG?

1. Upskilling  

The industry needs to upskill and increase knowledge and education on all ESG topics, argues Stopps. Right now, it’s fairly easy to recruit at a junior level and there is higher education on sustainability that just didn’t exist until quite recently.

At the mid-management level and above, things are more challenging.

There is a really small talent pool of people with 20 years’ experience. We see senior leadership moving in to ESG without the skills and the knowledge. This is a really challenging area to work in, it’s not a quick fix to suggest a programme and implement it, it’s a long slog.

To do that you need purpose and drive to believe businesses can be a benefit to society and the environment, and you can be a cog in the wheel to support that. That is sometimes missed at that senior level.

2. More than box-ticking

Firms should have a “very robust, strategic approach to ESG and sustainable businesses” to prevent greenwashing. This should be aligned to commercial strategies, and there should be good understanding of the financial risk to the organisation if it doesn’t take such an approach.

Currently, a lot of firms are still treating ESG as a box-ticking exercise or a data set rather than something to be integrated more holistically into every aspect of the business.

Setting science-bound targets and KPIs and then implementing them strategically is key, as well as being honest and transparent about how decisions are made.

3. Better reporting

We encourage better reporting as companies prioritise ESG and integrate it into every business area. “How do you report transparently in a balanced, coherent, accessible and honest way?”

Standardisation of reporting criteria should help here: the International Sustainability Standards Board is looking at bringing in a global baseline for sustainability-related disclosure requirements.

However, this is not something new, GRI [Global Reporting Standards] has been the gold standard in reporting for decades now, so there’s a lot of experience in that area already. Nicola Stopps, CEO of Simply Sustainable states, ‘I don’t think we’ll end up with one standard, I think we’ll end up with a couple just like with the financial reporting, there will be a few but it will be a lot simpler.”

This should make the concept of ESG more accessible to organisations, she suggests.

The time is now

Overall, our belief is that financial services firms must raise the bar on sustainability, and the time for action is now.

“We’re in 2022. Businesses need to actually start delivering. They need to meet climate change challenges and the stakeholder expectations on them. It’s not good enough now just to have targets and KPIs, they need to look at their business systematically and deliver sustainable transformation across their business,” says Stopps.

“This year and next will be the years of delivery.”

As climate change and sustainability move up the investor agenda, more capital is flowing to funds that demonstrate strong alignment with positive environmental, social and governance (ESG) performance. In 2021, over $500 billion of capital flowed into ESG-integrated funds which attributed to a 55% growth of assets under management in these products.¹

With this rise, investors are becoming increasingly sophisticated in their use of ESG information and focusing on tools that can help them understand the magnitude of ESG risks they face. To help ensure risk is managed effectively, financial organisations are looking to ESG rating agencies to provide a robust measurement framework. These agencies are designed to analyse current ESG-related disclosures and their impact against an organisation’s material topics, as well as those common within the sector, to determine performance on these issues.

ESG risks can be numerous, opaque and varied across sectors; so, ESG rating agencies are valuable tools to investors as they produce an impartial understanding of ESG performance to determine if an investment is socially responsible or not. For companies, the scores can be used as signals to showcase strong ESG performance relative to competitors when it comes to the impact on society and the environment.

There is currently much debate around the credibility of ratings agencies, as no two ESG rating agencies offer the same service, or the same methodology which creates varying scores and opinions on the same disclosure. For this reason, at Simply Sustainable, we believe that rating agencies are a good start to performance evaluation but shouldn’t be used in isolation to measure the total impact of an asset or organisation. We would also always recommend those agencies which use performance metrics against identified material topics.

Who are the main ESG rating agencies?

There are many ratings providers that use corporate disclosures to formulate ESG scores. With an abundance of choice, it is important to determine which ESG rating agency should be used for your organisation. Listed below are the top-rated, globally recognised ESG rating agencies which are commonly used by investors:

• MSCI ESG Ratings
• Sustainalytics ESG Risk Ratings
• Bloomberg ESG Disclosure Scores
• FTSE Russell’s ESG Ratings
• Institutional Shareholder Services (ISS)
• CDP Climate, Water and Forest Scores
• S&Ps Global ESG Score
• Moody’s ESG Solutions Group

It is important to highlight that each organisation applies separate methodologies which means the ranking of performance differs, but all include factors such as investment risk, financial strength, social responsibility and environmental sustainability. Agencies which utilise performance metrics against identified material topics of an organisation include MSCI, Sustainalytics. Other agencies such as ISS have a standard methodology, which weigh individual scoring based on applicability. These stand out as top agencies as the analysis is based on quantitative and qualitative data.

Since there is no one-size-fits-all, you will find that some agencies focus on specific areas of ESG performance. For example, the CDP provides environmental data, tools and research that can be used to inform investors about companies that are addressing material concerns linked to climate change, deforestation and water security.

The regulatory landscape: what are regulators saying?

At present, ESG rating agencies are unregulated which means that the methodologies go unchecked. The absence of oversight has allowed a proliferation of rating platforms to use corporate statements and generate their own ESG ratings. Unfortunately, this practice has led to some key challenges that firms have to navigate when looking for ESG accreditation. Such challenges include the lack of reliability and transparency of ratings and the potential for a conflict of interest between providers and users. Just as accounting practices standardised over time, so too will a uniform system be developed for rating ESG performance.

Why is regulatory oversight important?

Greenwashing presents a greater risk to investors and consumers, where companies oversell their sustainability credentials. Due to the subjectivity inherent in ESG ratings, there is a risk of confusing fact with opinion. For this reason, there has been further discussion of creating regulations which focuses on the transparency of ESG definitions, methodologies and the actions taken to reduce conflicts of interests within ESG Rating Agencies.

The regulatory view from three global jurisdictions

Europe

In February 2022, the European Securities and Markets Authority (ESMA) published a “Call for Evidence” on ESG ratings. In June, they published their findings, that companies using ESG ratings should dedicate some level of resourcing to their interactions with ESG rating providers, and that respondents highlighted issues with the level of transparency as to the basis for the rating, the timing of the feedback and the correction of errors.3 As this oversight increases, ESG ratings will become more reliable and useful.

United Kingdom

Recently, the UK’s Financial Conduct Authority (FCA), expressed its support for the regulation of ESG data and rating agencies.⁴ Doing so will protect both consumer interests, as well as encourage effective competition. Regulators are welcoming the idea of a Code of Conduct which will help govern the different ESG rating agencies. Such actions by regulators will promote transparency, integrity, and the independence of each rating agency.

United States (US)

The current ESG rating environment is turbulent as US regulators take a strong stance on ESG claims. Since 2019, 65 funds have been repackaged into ESG funds to appeal to sustainability-oriented investors.⁸ The Securities and Exchange Commission (SEC) primed to crack down on misleading ESG claims to influence a fair and efficient market. Following the SEC announcing a $1.5 million fine on BNY Mellon’s fund management for misleading information on ESG investments, even tighter rules and disclosures on marketing have been promised.⁵ Further within this field, Harvard Business School is progressing their Impact-Weighted Accounts Project to drive the creation of financial accounts to reflect a company’s financial, social and environmental performance.⁷

ESG ratings enable companies to showcase strong ESG performance relative to competitors. As experts, we can assist your company to pursue alignment with key ESG ratings and frameworks from the outset to shape the narrative in a format that investors and other stakeholders will understand and value.

¹ JP Morgan. Future of ESG Investing.

² CDP. Climate Transition Plans.

³ ESMA. ESG Ratings.

⁴ Reuters. Britain decide this year whether regulating ESG Raters.

⁵ Funds Europe. SEC fines BNY Mellon $1.5m for ESG misstatements.

⁶ Financial Times. SEC prepares crackdown on misleading ESG investment claims.

⁷ Harvard Business School. Impact-Weighted Accounts.

⁸ US Sustainable Fund Flows Slid First-Quarter 2022. Morningstar.

In what the World Economic Forum labels the ‘Fourth Industrial Revolution’, technological innovations are becoming faster, more efficient and more widely accessible. Technology has the dual role in transforming organisations within its ecosystem and as a digital enabler of sustainable solutions. Environmental, social and governance (ESG) performance is becoming a basic expectation of stakeholders as discussions around technology and ESG evolve to become more strategic, specific and regular.

Global companies like Google, Microsoft and Salesforce are leading the way in setting bold transformation goals that set them on track for net zero. But there is still a gap between commitments and real action. Analysis by 451 Research reveal that only 29% of the global technology companies have a formal ESG strategy.¹ With focus on sustaining competitive advantage, how can technology companies respond to sustainability and measure positive impacts?

1. Embedding circularity

The main issues that the sector continues to grapple with is reducing waste and the limitations of digital accessibility. Companies are expected to be accountable for the impact of the entire supply chain and to avoid contributing to ethical, environmental and human right violations. E-waste is quickly becoming one of the world’s fastest growing and most toxic waste streams, making it top of the circularity agenda. The UK is committed to ‘closing the loop’ and are taking a stringent approach to end complacency on e-waste. At the end of this year, the UK government will consult on reforms to the regulations around managing e-waste which will likely impose mandatory waste tracking.

In a circular economy, the intention is to produce a model of production and consumption with no waste or pollution. Rather, outputs are cared for, repaired, reused and recycled as much as possible. In contrast to the ‘take-make-waste’ linear model, a technology company that adopts circularity will benefit from improved efficiency, material cost savings, greater security of supply, better job creation, improved customer engagement and loyalty, more innovation and improved brand reputation.²  Either through improving environmental impact or encouraging habits of circularity, consumer-facing technology companies are in a powerful position to steer consumers towards more sustainable habits i.e. re-using and repairing products where possible.

Partnerships are vital and there are plenty of examples between technology firms and organisations finding ways to embed an inclusive circular economy. Environmental charity Hubbub and Virgin Media 02 launched a £400,000 digital lending scheme to support programmes that deliver on social and environmental benefits. ³ By pioneering a tablet lending scheme, the fund will assist community organisations to support people facing digital isolation to access the internet, and to reduce e-waste by recycling digital devices.

2. Identify a specific ESG approach

Another step would be to measure own ESG performance to build a culture of sustainability in and around the sector. Sustainability has never been more important to technology leaders, as 74% of CEOs agreed that increasing ESG efforts attract investors.⁴ Companies that want to excel in their ESG strategy must use compelling evidence to develop a unifying framework that identifies strategic priorities, commitments and key performance indicators (KPIs). This means that technology companies must first set expectations and commit to transparency. The Simply Sustainable method begins with developing ESG goals to establish mechanisms that measure and track relevant ESG metrics.

Alongside addressing their own priorities, companies should also drive change throughout their wider operating ecosystem. Technology companies should focus on working with suppliers and partners that align to their emission and reduction commitments – this will be a core feature to value propositions of the end-to-end lifecycle.

3. Find areas of material impact

To make progress on ESG performance, technology companies need to think about areas where change can make the most impact. Understanding the sustainability issues that are most relevant to the company and key stakeholders demonstrates that focus is on the most important sustainability issues. This will lead to focused efforts that deliver the greatest impact.

Materiality assessments are pivotal to a serious approach to sustainability and corporate responsibility. By continually evaluating, refining and talking to internal and external stakeholders, areas that are the most critical to the business will be prioritised. This demonstrates that a company is aware of the social and environmental issues that present sources of risk and opportunity.

4. Evaluate and communicate efforts

Communicating the journey to sustainability in the form of ESG reporting is both important to address growing stakeholder scrutiny, but also acts a measure to improve year on year performance. Companies that fail to provide qualitative context and content to stakeholders miss out on engaging all stakeholders. This is an opportunity for a company to position themselves as the solution that aligns with stakeholder concerns – by giving the ‘why’ behind operational changes and using ESG data to inform your sustainability strategy. By demonstrating to stakeholders their corporate approach to sustainability is beyond a ‘tick-boxing’ activity’, companies can expect to maximise their return on investment into ESG reports.

5. Adapt to changing workforce expectations

Today’s generation want company values that align with their personal values, with companies that innovate to address global issues being more attractive to skilled workers. To attract and retain top talent, technology companies of all sizes must be perceived as embracing sustainability with evidence to back up claims. For example, investing in learning and development for STEM subjects, diversity and inclusion, allowing flexible work or donating portion of profits to an environmental cause are ways that will more likely attract and retain skilled employees.

It is about the intention behind the initiative, not the scale of it. Companies are expected to have ESG embedded into the corporate strategy, and this does not exclude the technology industry. Finding ways to bring ESG closer to daily operations while allowing everyone to contribute will maximise a company’s total impact.

How Simply Sustainable can develop your ESG strategy.

Underpinned by decades of specialised experience in sustainability and ESG, we provide deep expertise to all our clients worldwide to enable transformation at speed and scale.

At any stage of the sustainability journey our robust and holistic approach identifies the key levers to match ambitious goals with clear targets and actionable roadmaps.

¹ ESG and Technology. S&P Global.

² The Circular economy in detail. Ellen MacArthur Foundation.

³ Tech Lending Community Fund. Virgin Media O2

⁴ Survey in CEO thinking on Sustainability. Gartner.

Companies worldwide are experiencing mounting pressure from investors, regulators, the public and other stakeholders to take environmental, social and governance (ESG) matters seriously. In fact, the number of ESG reporting standards and regulations at a global level has almost doubled in the last 5 years.¹ As there are more than 600 ESG reporting provisions currently available worldwide, with many having different interpretations of sustainability, the task of disclosing quality ESG information presents a major challenge for companies.¹

The lack of a single, standardised framework for ESG reporting, coupled with low compliance to existing regulation, has unfortunately fuelled the disclosure of misleading and/or inaccurate information.^2,3 Numerous international corporations, like Volkswagen and BP, have been exposed for greenwashing⁴ and a global review conducted by the Competition and Markets Authority (SMA) revealed that 40% of green claims made online by firms could be misleading consumers.⁵

While greenwashing appears to be rife and particularly problematic, companies are also starting to be exposed for misleading the public about how they treat their people. On International Women’s Day 2022, a day to celebrate the social, cultural, political and economic achievements of women, hundreds of British organisations posted to social media to show their support for the cause.⁶ However, on Twitter a bot was on the loose, which retweeted their posts but also shared the difference in median hourly pay between men and women at each firm.⁷ The Gender Pay Gap bot, which had the strapline ‘Deeds not words. Stop posting platitudes. Start fixing the problem’, highlighted the apparent hypocrisy between company posts and gender pay performance.⁷ In many instances, the gender pay disparity flagged by the bot was shocking, such as 68.6% difference at Ryanair.⁷ Companies in the public sector were not out of the firing line; Cancer Research UK, for instance, was revealed to have a 30.9% median gender pay gap in 2021.⁸

Consequently, and unsurprisingly, scepticism is high among investors with regards to ESG claims that companies make. Indeed, research conducted by Edelman in 2021 found that 86% of global investors believe companies exaggerate their ESG performance when disclosing results, and 72% do not think they will live up to their ESG commitments.⁹ Another recent survey of more than 4,600 individual investors across the UK, US, France and Germany obtained similar findings: 90% of respondents stated that they struggle to trust ESG claims made by businesses at face value.¹⁰

How can we rebuild trust and confidence among investors concerning ESG disclosures?

In response to growing calls from international investors for high quality, reliable, transparent and comparable reporting by companies worldwide on ESG issues, the International Financial Reporting Standards (IFRS) Foundation announced the formation of the International Sustainability Standards Board (ISSB) at COP26 in November 2021.¹¹ The ISSB has been tasked with developing a comprehensive global baseline of sustainability-related disclosures standards, providing investors and other capital market participants with the information they need to make informed decisions.¹¹ While a host of reporting standards already exist, there is optimism that the ISSB standards will be widely accepted and adopted – the IFRS sets financial accounting rules that companies in more than 140 countries adhere to, and because the standards build on existing ESG frameworks developed by other sustainability reporting initiatives, such as the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI).^1,12 By creating a comprehensive and detailed corporate reporting standards framework, companies will be able to measure and report their ESG performance in a consistent manner.¹¹ Ultimately, it will restore trust and confidence among investors and other key stakeholders in the ESG disclosures that companies make.

It is becoming more pertinent that companies need to transparently disclose their ESG performance to reduce the risk of reputational damage. Adherence to globally accepted standards, such as the GRI and SASB, can help companies to understand and effectively report their ESG performance; the imminent release of ISSB standards is anticipated to significantly ESG reporting worldwide.

At Simply Sustainable, we support an array of international organisations with their sustainability reporting, employing best-practice global standards (e.g., GRI) to ensure their disclosures meet the needs of key stakeholders. If you are looking for support with your sustainability reporting, please contact us using the details below.

¹ EY. Future of sustainability reporting standards.

² City AM. Better regulations, not more, are the answer to greenwashing controversies.

³ Carbon Market Watch. EU works to beef up regulations on green claims.

⁴ Earth Org. 10 companies and corporations called out for greenwashing.

⁵ UK Government. Global sweep finds 40% of firms’ green claims could be misleading.

⁶ Forbes. Twitter bot trolls organisations for hypocrisy on International Women’s Day.

⁷ Personnel Today. International Women’s Day.

⁸ Civil Society News. Cancer Research UK ‘disappointed’ by widening gender pay gap.

⁹ Edelman. 2021 trust barometer special report: institutional investors.

¹⁰ Edie. Survey.

¹¹ IFRS. ISSB

¹² The Globe and Mail. Is a reporting standard finally on the horizon