Such is the urgent nature of the climate crisis that environmental, social and governance (ESG) reporting has now become a major focus for businesses.
The rationale for this is clear. Consumers are increasingly choosing brands for their approach to ethics and the environment, and investors are eminently aware of this fact. As a result, businesses are duly responding by enhancing non-financial reporting to allow stakeholders to assess the wider value of the organisation beyond its financial performance.
But with this being complex and largely unfamiliar territory, the adviser’s role is critical. This is the focus of ESG and assurance director at KPMG, Harry Briggs.
Speaking to Accountancy Age, Briggs offers his take on key developments such as the IFRS Foundation’s new International Sustainability Standards Board and outlines his own initiatives with Fortune 250 companies and the Accounting for Sustainability charity.
How do you feel about what’s been done by regulators and standard setters with regards to ESG so far?
If we talk about ESG reporting, which looks to the standard setters, it’s been really fragmented up until now where private organisations have sort of stepped in to fill a void. And they’ve done a huge job advancing the ESG agenda for decades now. But you do end up with this kind of myriad of different standards out there. It’s a really confusing landscape and they’re all individual private organisations and foundations.
So, when the International Sustainability Standards Board (ISSB) comes along and it’s got the Internal Financial Reporting Standards (IFRS) foundation sat above it, and really importantly the IFRS foundation is overseen by the International Organisation of Securities Commissions (IOSCO), you suddenly have this kind of regulatory oversight of the standards you’re setting globally.
You need that backbone and that credibility if you’re going to amalgamate standards, and the fact that they could announce the creation of that board at the same time as amalgamating the Sustainability Accounting Standards Board (SASB) and the Value Reporting Foundation (VRF), you’ve immediately got that kind of coherent strategy. So that’s an absolute step change.
In parallel to that, the European Financial Reporting Advisory Group (EFRAG) has been directed by the European Commission to develop its own sustainability standards. So, when the Corporate Sustainability Reporting Directive (CSRD) comes in, you’re going to have a whole bunch of new sustainability guidance being developed in Europe.
Now, stepping back, that’s potentially a bad thing for convergence, because you’re going to have standards coming from the ISSB, and standards coming from EFRAG. But there was a side event at COP26 where they got together and explained what that landscape looks like, and the key difference between the two is the view on materiality. So, the ISSB, coming from its SASB background, is very focused on what’s financially material to investors coming into the company. EFRAG has teamed up with the Global Reporting Initiative (GRI), which is currently the world’s most used set of ESG standards, and they take a more holistic view of materiality. So, we are going to see different approaches from EFRAG and the ISSB, but I think what EFRAG is saying is that the ISSB is great, but we’re just going that step further, which is an interesting way of positioning themselves.
So, I’d say the ISSB is a huge step, and it has simplified the landscape of standards, but we’re not going to end up with just one standard setter. We may go from 10 down to three, but we’re not going to go down to one.
The other side of this is around regulation, and what we’re seeing at the moment is the rollout of mandatory reporting requirements, which times quite nicely with this change in standard setters. They’re rolling that out in the UK and currently, they’ve chosen the Task Force on Climate-Related Financial Disclosures (TCFD) as their reporting framework, which is the climate focus standard, and that’s sort of aligning to the UK’s net-zero target by 2050.
What the UK has said is that it will look to move to the ISSB in due course. So that’s a key development from a regulatory point of view that we can expect to see in the UK over the next few years.
What should the key objectives of regulators and standard setters be?
They’ve got to build trust in the market. That’s the core responsibility of a regulator really and standard setters are there to facilitate that. Then capital markets need to be able to function and that needs to be based on trustworthy information.
You’ll have heard a lot about “greenwashing” and that’s something they need to be aware of. And then I guess the concept of greenwashing is evolving a little bit. So, it’s not just missing or incomplete or erroneous reporting of information – now we’ve moved into this area of these net-zero pledges with often very short timelines. There’s a lot of scepticism in the market around how these companies achieve that. And I think what a lot of companies are finding is that it’s an awful lot more difficult than they thought to actually achieve some of these pledges.
That’s where they really need the input of advisers and people with the right skill set to help them pull together a strategy on how to get there. And regulators need to be aware of that: net-zero pledges that can’t be backed up are going to hit confidence in the markets.
What do businesses and advisers need to get right in order to further the ESG agenda?
When it comes to the businesses, you have to recognise that these net-zero commitments have been initially made by a lot of governments, and there is a very real impact from making that commitment because it means whole sectors and whole industries will have to change.
There’s a couple of obvious examples of this: the energy sector, where you’re not going to have coal power fire stations anymore, or the automotive sector where they said they’re going to get rid of combustion engine cars in the near future. So that’s just going to completely upend supply chains and industries, and companies need to be able to pivot and adapt to that.
And on top of that, they then need to explain what that journey looks like. So, if you’re an investor in those sectors now, you want to know how the five- or 10-year plan plays out. And at the moment, that communication isn’t coming through because all these companies are still figuring out how they’re going to do that.
And that’s where the adviser role comes in. So, if you think of ESG as a series of pillars, you’ve got a reporting and assurance skillset, but you’ve also got the more strategic skillset around ESG. And if every company in the world went out to employ those people, there wouldn’t be enough people with expertise – it’s as simple as that. So, you need help from advisers who can advise across industries and across companies. It’s no good just having kind of one viewpoint from within one firm. You need to be working across sectors to actually help entire industries move in the same direction. So that expertise is going to have to come from centralised advisers.
You need that ability to look across more than one company and bring out the best practice. And you also need that voice to go back to the standard setters and regulators and communicate what the actual challenges are from industries and sectors. Because at the moment, we’ve got a lot of pledges, but not a lot of substance in terms of how we get there. And that’s kind of where we expect to be right now, but it’s just the journey we have to go on over the next few years to figure that out.
In your capacity at KPMG and beyond, what role are you playing in furthering the ESG agenda?
My focus is ESG reporting primarily. For me, reporting is the catalyst that helps start all of this, because if you’re a business that’s trying to get to net-zero, you need to know where you are today. And with the confusion around all these different standards, it’s very challenging for a company to start down that journey.
Every day, we have more companies coming to the table looking to do some level of ESG reporting, and it’s just impossible for them to try and work it all out. So that’s kind of where I’m playing my role. A lot of what I’m doing at the moment is talking to businesses at various stages on that journey.
Large companies are sitting down with me in detail for hours at a time each week and telling me about their experiences. And then it’s my role to disseminate that to my client base and the wider market through this free reporting guide that will be published shortly.
And a lot of the speaking I’m doing at various events, webinars and things like that is based around just trying to get that message out there that this is a difficult thing to do, but a necessary one, and that companies need to look at this sooner rather than later.