By: Marc Siegel, EY Americas Corporate and ESG Reporting Leader

Just as homes built decades ago were not plumbed for today’s appliances and lifestyle requirements, most companies now need to update their corporate reporting plumbing and processes to support today’s environmental, social and governance (ESG) data gathering and reporting needs.

As a practical matter, the lack of plumbing to support ESG corporate reporting contributes to a significant disconnect between the ESG disclosures investors desire and the information companies report. The technological systems most companies built, generally to support financial reporting, were established based on requirements created decades before. As with a home, updating the technological plumbing is costly. It also needs to be done with a strategic focus and an eye toward compliance.

With the implementation of the Sarbanes-Oxley Act 20 years ago, companies modified their finance systems to comply with the standard, but the ESG focus of today was not yet a glimmer in anyone’s eye. As a prominent professor of business administration wrote: “Until the mid-2010s, few investors paid attention to environmental, social and governance (ESG) data — information about companies’ carbon footprints, labor policies, board makeup and so forth.”[1]

Today, the technical work most companies need to complete is significant. In fact, more than three-quarters of investors surveyed (78%) think companies should invest in their processes and technology to address their business’ ESG issues, even if it dents short-term profits, according to the EY Global Corporate Reporting and Institutional Investor Survey, and just over half (55%) of companies surveyed agree. Aware of the potential cost and scale of the effort, 20% of the finance leaders surveyed said investors are “indifferent” to long-term investment, including those relating to sustainability.

However, an increasing number of companies produce sustainability reports. In 2021, 96% of S&P 500 companies and 81% of Russell 1000 companies published sustainability reports, according to recent Governance & Accountability Institute, Inc. analysis. 

Although 99% of the investors surveyed for the EY report use such corporate disclosures to help inform investment decisions, 80% of them said too many companies fail to properly articulate the rationale for their long-term investments in sustainability, making it difficult to assess the impact.

In response, the Securities and Exchange Commission (SEC) has proposed a climate disclosure rule, which is expected to be finalized this year. This expected new rule comes on the heels of the Corporate Sustainability Reporting Directive (CSRD), finalized by the European Union in 2022 to “make businesses more publicly accountable” with disclosure of their “societal and environment impact.” The first set of CSRD standards is expected in June 2023. Global corporations will want to consider the CSRD and other regulatory requirements where they operate.

As regulatory requirements are published in various jurisdictions, the uncertainties about what needs to be disclosed will dissipate, but other uncertainties will remain. The infrastructure already exists to capture required financial information. However, the infrastructure for much of the ESG data capture and reporting has yet to be built out. While disclosure processes and controls are table stakes for companies impacted for 20 years by the Sarbanes-Oxley law, the rigor with which most companies evaluate ESG data is much less. Reporting organizations could face a significant effort to prepare for ESG reporting.

Furthermore, to revisit the plumbing analogy: Unlike water being piped through a house, the data companies must collect and report out has multiple sources, and depending on what must be reported, many companies may rely on external sources to provide what they hope will be accurate information. Otherwise, it is garbage in — garbage out.  

But the work should be done thoughtfully. Data collection, analysis and management is a significant undertaking. When trusted and used properly, data is also valuable to the business overall. As the business administration professor also proposed, companies should start with strategy and factor it into their operations to create the value that investors want to see in parallel with environmental and other social benefits.

While companies work strategically to connect their ESG agenda with broader business initiatives, transform the future of corporate reporting and close the stakeholder disconnect, they will want to build a modern finance function that is smart, connected and talent led. This next-generation finance operating model should be underpinned with artificial intelligence and other tools to manage and mine analytical insights while enabling finance people to collaborate across business units and functions to address enterprise needs with greater agility.

About the author:

Marc Siegel, EY Americas Corporate and ESG Reporting Leader, Financial Accounting and Advisory Services, is a Sustainability Accounting Standards Board member and former Financial Accounting Standards Board member. A recognized thought leader in accounting and reporting, Marc is an auditor, consultant, forensic accountant, analyst and standard setter. He also is a member of the American Institute of Certified Public Accountants and the New York State Society of CPAs.

The views expressed by the author are his own and not necessarily those of Ernst & Young LLP or other members of the global EY organization. Moreover, they should be seen in the context of the time when they were written.  

[1] Serafeim, George, “Social-Impact Efforts That Create Real Value,” Harvard Business Review, https://hbr.org/2020/09/social-impact-efforts-that-create-real-value#social-impact-efforts-that-create-real-value, October 2020.

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