How Can Corporate Reporting Bridge the ESG Trust Gap?

Yet more ESG news coming your way. The recently EY Global Corporate Reporting and Institutional Investor Survey finds a significant reporting disconnect with investors on ESG disclosures.

According to the survey, Companies continue to invest more time, resources and leadership effort into sustainability. “However, there is still a significant disconnect between the expectations and goals of companies and their investors when it comes to corporate and sustainability reporting — in particular, the ESG disclosures that (along with existing financial statements) can help companies and their stakeholders to communicate and assess performance against strategic risks and opportunities in multiple dimensions.”

This disconnect, says the survey, “could potentially undermine the smooth running of capital markets, the collective battle against threats such as climate change, and the trust that is necessary between a company and its stakeholders, including customers, employees and communities.” The EY Global Corporate Reporting and Institutional Investor Survey explores these issues, drawing on a methodology that canvassed 1,040 senior finance leaders at the companies issuing reporting and 320 institutional investors as users of those disclosures. Three important themes emerge for the future of corporate reporting:

  1. The disconnect between companies and investors: There is a significant disconnect between companies and investors when it comes to maintaining a focus on long-term value creation and sustainable growth, and avoiding short-term thinking.
  2. The importance of effective corporate reporting: Effective corporate reporting could be key to building alignment and understanding, but investors say that current ESG disclosures do not meet their requirements and expectations.
  3. Understanding expectations: To close this gap, the research suggest companies should build a better understanding of the sustainability expectations of long-term investors and earn their trust by defining the involvement of the finance function in ESG disclosures.

The survey notes that, for both companies and investors, a long-term view is inseparable from sustainability considerations. “However, when it comes to the trade-off between short-term earnings and long-term value creation, there is a disconnect between investors and finance leaders. Investors are much more likely to favor decisions that lead to sustainable, long-term value creation even at the expense of short-term earnings shortfalls, but finance leaders are much less inclined to make that trade-off.” The research specifically found that over three-quarters of investors think companies should make this trade-off, but only around half of finance leaders are prepared to take this long-term stance.

The research paper notes that, “if finance leaders do not share investors’ appetite for prioritizing long-term, sustainable investments, will a company’s disclosures reflect what investors see as strategic priorities? Or will the reporting be seen by investors as lacking a clear narrative on the strategy for growing and protecting long-term, sustainable value? If reporting is seen as lacking clarity, could this explain why some companies feel they are not ‘rewarded’ for the long-term sustainable plays they do make?”

In a similar vein,” if companies are seen as less willing to make these difficult trade-offs, could investors become concerned that leaders will not make the investment commitments required to move from ESG promises to concrete progress?”

For more survey results and EY’s interpretation of them, please see How can corporate reporting bridge the ESG trust gap? | EY - Global.