Shaping the future of ESG reporting

Genpact partnered with The B Team, a nonprofit that advocates for new corporate norms that secure a safe, sustainable, and equitable future, and the Confederation of Indian Industry (CII) to capture the voice of industry on driving harmonization of ESG reporting guidelines. We shared our findings with B20 India, a forum for the global business community, and its ESG in Business Action Council. Here, we share our findings.

The World Economic Forum is not holding back. Its latest Global Risks Report named the failure to mitigate climate change the number one risk for the next ten years. And the solution requires everyone to play a part. Companies of all sizes must lead the sustainability charge and commit to transforming their businesses, driven by bold environmental, social, and governance (ESG) goals.

But with greater demand from regulatory bodies, customers, and investors to measure, communicate, and improve on their ESG progress, businesses face a number of ESG reporting challenges. The lack of consistent data standards and guidelines across regulations is deepening the need for harmonized global ESG reporting requirements.

To transition into a more inclusive, sustainable economy, businesses need accountability for their performance and impact. But this accountability is contingent on robust and consistent corporate sustainability reporting. The mission of the International Sustainability Standards Board (ISSB) is to establish a global baseline standard, a goal we welcome and actively support alongside our partners, The B Team, a global collective of business and civil society leaders, and CII.

The release of the inaugural standards (IFRS S1 and IFRS S2) by the ISSB is a significant step toward establishing a global baseline of ESG reporting standards and guidelines.

But to enhance adoption, hearing from the companies that must respond to these guidelines is key.

Genpact, The B Team, and CII brought together 15 global finance and sustainability leaders from enterprises in industries ranging from financial services and high tech to life sciences and manufacturing. We invited them to share their perspectives with B20 India's ESG business action council in a virtual roundtable discussion. Our goal: to capture the voice of industry on how global organizations need a harmonized and consistent approach across standards and what aspects regulators could consider to create more inclusive and harmonized standards. These leaders identified four key themes:

Considering that the current reporting landscape is fragmented and complex, our participants agreed that companies need universally acceptable standards of reporting. This includes standards that are integrated, inclusive, and adaptable – and equally applicable – for developed and emerging markets, small and large-scale businesses, and all levels of the supply chain. At the same time, the group also recognized that achieving 100% standardization may not be possible. So regulators and standard-setters should work toward establishing a common minimum baseline prescriptive with common definitions, denominators, and methodologies.

The participants suggested that the common minimum baseline for reporting should be structured in a way that applies to all organizations regardless of their size, scale, and geographical footprint, with the flexibility to include regional, industry, country, and scale-specific nuances. The participants agreed that this would not only ease the burden on global organizations but also drive consistency and comparability and enable benchmarking at an industry level.

Attendees also agreed that integrated financial and nonfinancial reporting – rather than standalone ESG reporting – will further help deliver harmonization efforts and standardized reporting.

The participants also aligned on the need to make these standards globally inclusive and integrative. This means they must include the perspective of developing and emerging economies – the global south – and apply to all economies.

Two points about the scope of the current reporting standards emerged:

i. Double materiality versus financial materiality

Most existing standards address the financial risks associated with ESG and largely cater to the investor community. The common view was to broaden the scope of standards by taking not only an outside-in but an inside-out perspective as well – a double materiality concept.

Double materiality captures the impact of the organization on the planet, people, and society, similar to capturing the impact of the planet, people, and society on the organization. The participants favored the double materiality concept as proposed by the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD), referring to it as the future of life and key to humanity.

ii. Focus beyond climate-related issues

Although the climate crisis today is most prominent, the participants discussed how other aspects related to nature, such as biodiversity and water, are also important.

The participants also agreed that climate-related disclosures are more globally streamlined compared to other nature-related aspects that are more localized, and global standard-setters could consider including nature-based risks and opportunities as part of mainstream reporting.

The participants also highlighted the need to find a balance between the different ESG dimensions – environmental, social, and governance. With strategic action plans in place, companies should have robust governance structures integrating ESG as part of their enterprise-wide strategy.

During the discussion, participants also pointed out that reporting and disclosures based on different standards or even a common minimum baseline is just one piece of the puzzle. There is another critical aspect that regulators and standard-setters need to consider: how these disclosures can enable ESG performance.

One idea the group discussed was linking ESG metric performance with the materiality of the metric through a weighted scoring model to understand the real impact that any organization can drive. For instance, if an organization is performing well on a particular ESG metric but that metric is not material and does not have a large impact on the industry or organization, then it does not give an accurate picture of the overall ESG performance. One of the recommendations was that standard-setters could consider an industry-level, ESG topic-focused materiality and scoring logic to unlock the potential of ESG disclosures and reporting and drive performance.

The participants agreed that technology plays a key role in analyzing reported ESG data to help enterprises take action and drive ESG performance. They also highlighted that a digital repository platform accessible by organizations on a shared database would further facilitate benchmarking and analysis across organizations and industries.

ESG data recording and reporting is complex and not yet streamlined like financial reporting. The disparate and unstructured nature of quality of ESG data limits an organization's ability to provide complete and auditable disclosures. So independent assurance takes longer and puts additional pressure on businesses and finance teams to release ESG reports alongside financial reports. The group also pointed out that given a business's process, data management, controls, and assurance needs to achieve investor-grade disclosures, CFOs will play a proactive role in driving accurate and transparent ESG reporting. Finally, the group highlighted the need for a robust governance structure to drive successful ESG integration into business models, strategy, and execution. Everyone suggested that it is important for the board and its committees to have ESG qualifications to drive ESG performance. And they recommend that regulators could consider making ESG qualifications mandatory to push the agenda.