ESG, Sustainability Initiatives, And Financial Reporting
The intersection between ESG and financial reporting is rapidly evolving due to rising investor awareness about the impact of ESG factors on company performance as well as the new disclosure requirements recently proposed by the Securities and Exchange Commission and other global regulatory agencies.
In recent years, the SEC has taken enforcement actions against specific companies based on alleged false claims or false reporting about ESG-related issues, and in March 2021, the SEC launched a specific Climate and ESG Task Force to proactively identify ESG-related misconduct.
Growing investor interest and emerging sustainability reporting standards mean it is not enough for companies to say they have great environmental protection or human resources programs in place.
Voluntary sustainability reporting has historically been about creating a selective narrative to share positive stories, but as it is brought under financial reporting, companies will be required to tell the whole story.
In reporting comprehensively about ESG issues, companies are likely to find that some parts of the story are positive while also identifying opportunities for improvement.
Companies must take the rigor of financial reporting and apply it to these new data streams, looking at where the data is coming from, who is validating it, and assessing whether it can be tested for completeness.