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Way Forward or a Broken Dream – Sustainability Reporting

Sustainability becomes continuously more significant topic to pay attention to, impacting all the industries. The financial industry is by no means an exception. In order to properly identify, assess, measure and monitor different companies in portfolio and their financing, different frameworks have been introduced and implemented – such as ESG (environmental, social and governance) framework. Sustainability reporting started as a voluntary activity, where frontrunners recognized the opportunities linked to better transparency. This soon became a required practice. SDGs, Paris Agreement, IPCC reports, WEF Global Risk Report – the need to change how the world operates and how we live and do business became apparent.

At the EU level, European Green Deal has been introduced, with clear target to reduce the greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels and reaching climate neutrality by 2050. The EU Climate Strategy launched in 2020 aims to make Europe a climate-resilient society by then, fully adapted to the unavoidable impacts of climate change. The recent European Climate Law turns the European Green Deal’s targets into legal obligations.

Have the Sustainability Reporting Efforts Provided a Way Forward?

The assumption in the past has always been that if companies committed to measuring and reporting publicly their sustainability performance, the following would happen: |

  • ESG performance would improve
  • Sustainable companies would record better equity returns. Sustainability companies would be appreciated by public and the markets, the laggards would disappear
  • Measuring sustainability would be clear, harmonized and widely spread

But are these assumptions really true?

A closer look at the sustainability reporting suggests that the impact of the measurement and reporting movement might have been oversold. Reporting does not ensure environmental and social improvement — though people often conflate the two. Questionable data sources and data quality, complexity, lack of tools and transparency of e.g. supply chain inputs, targes not based on science are just few challenges FS companies are facing. Many of our clients have found the sometimes vague language used to define and classify green assets unclear. There also seems to be a lack of homology surrounding the initiatives that cause confusion and difficulties, especially when it comes to adequate comparison. Saying that, sustainability reporting is here to stay and needs to become fully integrated part of the financial reporting. So what is the way forward? What to consider regarding SFDR (Sustainable Finance Disclosure Regulation) and CSRD (Corporate Sustainability Reporting Directive) and ECB Climate Stress Test in 2022? With more market push daily, these rather significant challenges surrounding sustainability management and reporting really need to be addressed.

At ACE, we help demystify sustainability reporting for our clients. We give them the frameworks, analysis, and clarity they need to build in-house capabilities to handle all regulatory change better.

As always, thanks for reading. If you want to learn more about how to better prepare for embedding sustainability into your strategy, including assessment, measurement, management and reporting, reach out.