Harnessing the competitive advantage with integrated ESG reporting

A recent regulatory overhaul in the EU could mean that integrated ESG reporting would increase companies’ competitiveness, with new directives mandating third-party audits of both companies’ impact on the environment and the climate risks that they face.

Investors have grown increasingly concerned in recent years that companies’ financial reports do not accurately illustrate a company’s shareholder value. Historically, “non-financial” factors such as reputation, longevity, and shareholder trust have all been considered less important than a company’s net assets in assessing its overall value. But these more intangible factors – which have included a company’s sustainability – carry increasing weight when assessing market capitalisation.

Sustainability and ESG’s relevance to corporate value and longevity cannot be overstated. According to a study by UN-supported international network UNPRI, global sustainable lending activity increased to US$322 billion in September 2021 from US$6 billion in January 2016. In 2020, 85% of investors considered ESG factors when investing, but only a tenth of them could find the information they were looking for in a corporate disclosure – meaning the companies that do include sustainability factors in their disclosures are already at a competitive advantage.

Opportunities in a new legislative era

Recent moves by regulators are also making ESG reporting integral to companies’ success and longevity. Among the wave of stronger policies that centre sustainability is the EU’s Corporate Sustainability Reporting Directive (CSRD), which came into effect on the 5th of January. The directive requires companies to provide third-party audited reports on potential positives and negatives of their operations on people, the environment, and for their investors in the short, medium, and long term. 

The CSRD marks a significant departure from its predecessor, the Non-Financial Reporting Directive (NFRD). The NFRD did not mandate “double materiality” — meaning companies’ reports will need to outline both, for example, how their business impacts the environment, as well as the climate-related risks it faces. While many leading companies have already been doing it, thousands more will need to get onboard to comply with the EU’s new directive.

In practice, the new legislation is a push for companies to cease the longstanding practice of separating financial and sustainability reporting. While the sustainability reporting data does not usually come formatted in currency form, the information it conveys is filled with the details of costs to an organisation. Examples include offsets projects, carbon taxes, increased insurance costs against building deteriorating or flooding risk, and the financial cost of depreciating assets. 

All these costs are still considered by many as “non-financial” – but to exclude them from any summary report intended to accurately represent an organisation would be a mistake. An accurate picture can only be painted by looking at both sets of data in a single integrated report. Investors and stakeholders agree: more than 2,500 in over 70 countries had adopted integrated reporting as of the autumn of 2022, according to the International Financial Reporting Standards Foundation. Morgan Stanley has considered ESG factors integral to assessing a company’s quality and have integrated ESG considerations into their investment process. 

Integrated reporting emphasises communicating an organisation’s strategy, governance, performance and prospects in a format that accounts for its external environment. In the context of the CSRD, companies are required to report the sustainability risks it faces in detail throughout supply chains, and to meet cross-cutting standards of disclosure affecting its finance, ESG, risk and controls departments, all certified by an external auditor and delivered in a singular machine-readable report.

Building integrated reporting practices provides an opportunity for enhanced transparency and, ultimately, better risk-management. In a 2023 commissioned Total Economic Impact™ study conducted by Forrester Consulting on behalf of Workiva, a SaaS company and the only unified platform for financial reporting, ESG & GRC, it was found that a composite organisation based on interviewed customers using Workiva’s integrated reporting product saw a three year return on investment of 204%. 

Optimising efficiencies

Andie Wood, Workiva’s Vice President for regulatory strategy, said the shift in language between the NFRD and CSRD “gives a very strong hint to the broad operational nature” they expect the new regulation to be considered in.

“They’re not just asking an organisation to disclose some data, but also for them to consider their strategy and the [ESG] risks,” Wood said. 

“I’m not unsympathetic to why organisations look at the scale of this and find it daunting, the numbers do look a bit worrying, but I think this is one of those areas born for technology,” Wood said, adding that optimising efficiencies in the reporting process is more material now than ever before.

Breaking down organisational silos could be another added benefit of the new directive. Companies will have to find innovative ways to make sure that sustainability information is treated with the same degree of rigour and suspicion as financial information.

Sustainability teams hold considerable technical science and topic expertise – integration can help them share this with their finance colleagues, who bring their years of financial reporting experience to the table, particularly working with the previous directive to develop appropriate metrics and key performance indicators to measure and monitor ESG performance. Earlier oversight by auditors leads to a smoother process overall, particularly during review.

“For sustainability teams, [audits are] not a pressure they’ve had to face, so there’d be a different approach to how you’d do your job naturally,” Wood said.

She adds that the well-known challenges to collecting sustainability data – the broad scope of the data that needs collecting, data unavailability – provide further significant challenges for sustainability teams to address. “There are efficiencies to be found, however: data from internal management reports, for example, could be repurposed, again providing an opportunity for valuable integration of financial and non-financial teams,” said Wood.

Unlike financial data, sustainability data often needs to be pulled from across the organisation – the team monitoring a company’s methane emissions, for example, probably won’t be the same team recording workplace sentiment. Once the data is compiled, even more integration will be required – the sustainability team holds the subject matter expertise necessary to interpret the non-financial data, whereas the expertise on how to report data in a form that is optimised for external auditors. Both teams will have to work together to meet the requirements of the new directive, aligning their reporting timelines and ultimately providing both regulators and their company with a thorough, more authentic picture of the business.

Wood said Workiva’s Total Economic Impact study also made it clear that integrated ESG reporting enhanced organisations’ ability to make strategic decisions. “What we put in the report should be a reflection of how we’re thinking and operating as an organisation”, said Wood. “I think it’s still the case for most organisations that the majority of the advantages come from that integration back in the process.”

Integrated ESG reporting is of increasing importance to stakeholders, investors, and now a demonstrated priority of regulators as well. This trend towards compliance and sustainability presents opportunities for companies to stress-test their strategies for the long-term in a changing financial landscape, and to identify opportunities for efficiency in the process. Ensuring business models incorporate ESG factors is no longer a moral consideration; in the age of sustainability, it is a demonstrated competitive advantage.

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