The U.K. Financial Reporting Council (FRC) earlier this month published a paper setting out how companies’ environmental, social, and governance (ESG) reporting should be improved.
The FRC is concerned that as regulations change (not just in the United Kingdom, but internationally), so too does the quality and consistency of ESG reporting.
To tackle this problem, it has proposed a series of measures from which companies—as well as other regulators like the Securities and Exchange Commission (SEC) in the United States could benefit as ESG disclosures receive closer scrutiny.
Specifically, the FRC says there needs to be better:
- Production of ESG data. Better internal information leads to better decisions and insight for stakeholders. The FRC says reporting is often “aspirational and high level,” such as a company making a commitment to meet a net-zero target rather than providing users with information about actual progress, whether the strategy will deliver the commitment, and whether financial statements are aligned with the commitment.
- Audit and assurance so that the reported information is robust and reliable. The FRC is aware there can be a lack of credibility in ESG reporting, which is why many companies commission independent experts to provide assurance. However, the regulator says it is “especially important to be clear about what is assured and what level of assurance is provided”—meaning such reports are only useful if the data is comprehensive and verifiable and the metrics such data are measured against are clear. The FRC warns financial statements might also not take proper account of material ESG issues affecting the company.
- Distribution of ESG information so it is made accessible to interested parties. Currently, ESG information is often located in separate places, reports, and media at different dates and often not in an accessible or reusable format.
- Consumption to ensure ESG information leads to better decision-making by stakeholders. Users can often have difficulty obtaining ESG data; where it does exist, it is often based on incomplete frameworks and differing methodologies, has limited comparability, and/or is not timely. This can lead to ESG data being considered not as reliable as financial data. As such, stakeholders find it hard to make effective decisions and investors find it difficult to address their own regulatory requirements.
- Supervision so information and activity are appropriately monitored and requirements are enforced. “Patchwork” regulatory oversight and enforcement “does not aid consistency,” says the FRC.
- Regulation. Coordination and coherence lead to efficiency. “Without wider cooperation and co-creation [between international regulators and standards-setters], it is unlikely that frameworks will be compatible, timely, and of equal quality,” warns the FRC.
The FRC says companies can easily make improvements and simple steps can have an enormous impact. For example, if a company has adopted the Sustainability Accounting Standards Board’s (SASB) standards on ESG reporting (seen as the “gold standard”), then they should say so. The FRC found a number of examples of SASB reporting provided as a separate appendix on a company’s website, with little signposting from other documents (such as the annual report). Companies should also be more specific when they do refer to SASB standards and the metrics they are using.
Similarly, companies should make it clear when they don’t report under all the SASB metrics for their industry sector. The FRC says while some metrics might not be relevant, “It is better practice to explain why the disclosure is not applicable, otherwise it is not clear to investors why they are not included.”
While many companies obtain independent assurance on aspects of their SASB disclosures, the assurance reports themselves are not always appropriately linked to the actual disclosure. This situation reduces the ability of users to understand exactly what is and isn’t covered by assurance. The FRC says distinguishing assured metrics with an icon, for example, would help the user.