There is an increasing focus on both how companies report the impact of their activities on the environment, and on the wider societal challenges to which business models must respond. There is a danger of ‘greenwashing’, which is a practice that is used to promote the perception that a company’s policies or offering are completely sustainable or environmentally friendly.
Unclear sustainability strategy ambitions and inauthentic alignment to frameworks
Often, reporting is aspirational and high level (e.g. a commitment to meet a net-zero target, or a commitment to invest a certain amount to meet such an objective); however, this type of reporting does not provide stakeholders with information about progress, whether the company’s strategy will deliver the commitment, and whether financial statements are aligned with the commitment. The sustainability frameworks used can be loosely aligned, with no real rationale, which could give stakeholders a false impression about the company’s ambitions.
Lack of data to support sustainability ambitions
Companies make commitments but do not provide the data to evidence their progress. With information relating to ESG aspects of a company’s sustainability becoming more significant, the underlying data systems, and the data that supports reporting, is not invested in. The lack of useful and usable information results in stakeholders finding it difficult to make effective decisions about the company’s sustainable efforts.
Lack of audit and assurance
As there can be a lack of credibility in ESG information, companies are often keen to commission independent assurance. Unfortunately, when this is not the case, reported information does not appear robust or reliable. It is especially important to be clear about what is assured and what level of assurance is provided to maintain trust and transparency with stakeholders. Financial statements may also not take account of material ESG issues affecting the company.
Lack of non-financial KPIs and link to remuneration policy
Companies may claim an integrated way of doing business, incorporating sustainability matters in the heart of their business and strategy; however, non-financial/sustainability measures may not feature in the company’s core set of KPIs. The immaturity of the data can mean that it is not considered to be as reliable as financial data. The lack of incorporation of non-financial KPIs to determine remuneration outcomes may be insufficient for a leadership of a company who has made a commitment to act on ESG matters and considers this a top priority for their company’s performance.
Lack of insight about the alignment of culture
Companies can make claims about a strong alignment between their culture and aspects such as purpose, strategy and values; however, do not evidence adequate investment in people, clear ethical standards or monitoring of culture. The Board’s involvement in the effective monitoring of culture ensures accountability. The inclusion of cultural-related metrics is vital to provide transparency to stakeholders and ensure corrective action is taking place at Board level.