European Audit Committee Leadership Network, April 2020
Investors and other stakeholders have become increasingly interested in understanding companies’ environmental and social impacts and their consequences for financial performance. This interest has led to an increased demand for environmental, social, and governance (ESG) reporting, which has in turn sparked demand for standards to ensure that the information captured is meaningful and comparable. Several questions have emerged. For example, how do investors use ESG reporting? What kind of standards have been developed and how are they evolving? What issues are companies facing as they ramp up their reporting?
On 20–21 February 2020, members of the European Audit Committee Leadership Network (EACLN) met in Amsterdam, where one of the main sessions addressed these and other questions. They were joined by Martijn Bos, policy advisor on reporting and audit at Eumedion, the Dutch forum for institutional investors including pension funds, insurance companies, and asset managers; Bastian Buck, chief of standards at the Global Reporting Initiative (GRI), an organization that has developed a widely used set of ESG reporting standards; and Alex Williams, senior governance specialist at APG Asset Management, the Dutch pension fund manager.
The guests and EACLN members explored various broad topics related to ESG reporting:
Rising investor interest in ESG reporting
Investor interest in ESG has been rising steadily for many years, and recent statements by large asset managers including BlackRock suggest a step change in focus. Investors seek to understand the influence of ESG factors on company performance and on the broader society. They are incorporating these factors into their stewardship efforts and investment decisions, and coordination between stewardship and investment teams is deepening.
The fragmented landscape of standards
Numerous organizations have responded to the growing demand for ESG reporting standards. Some standards are geared toward investors and are focused on financial materiality, while others address a wider range of stakeholders and use broader concepts of materiality. This proliferation of standards has also prompted calls for more alignment and consolidation. Several initiatives seek to address these demands, including an effort by the European Commission to review and strengthen its nonfinancial reporting directive.
Disclosure processes and oversight
Many companies are already reporting extensively on ESG matters, but they are still adjusting the delegation of responsibilities and the systems involved. Companies are grappling with challenges that include assessing the materiality of disclosures, establishing effective reporting processes and controls, and securing the right level of assurance. As the disclosures include more metrics, oversight of the process has shifted away from the communications team to the finance function.