ESG reporting is shifting from voluntary to mandatory due to global regulations.
Technology solutions can help organizations with various reporting requirements.
Boards can help align ESG strategy with financial performance.
Video: Directors & Boards Governance Conversation – ESG governance and sustainability reporting
Host: David Shaw, Directors & Boards
Featured guest: Alex Kotsopoulos, RSM Canada
Note: This interview has been edited for length and clarity.
David Shaw: Environmental, social and governance has become something of a political flash point, but many companies and investors still look to emphasize sustainability in their overall decision-making. So how should boards think about sustainability in terms of value creation?
To discuss this, I'm joined by Alex Kotsopoulos, a partner in the ESG advisory practice at RSM Canada. Alex, you're the co-author of “Welcome to the third wave of sustainability reporting,” an article where you look first at corporate social responsibility and then at ESG’s rise as two waves. What is this third wave of sustainability reporting?
Alex Kotsopoulos: Thanks, David. The third wave of sustainability reporting is all around moving from a voluntary to an involuntary ESG and sustainability reporting framework. It is largely associated with governments and regulators all around the world establishing various reporting requirements to get companies to standardize some of their existing ESG disclosures, but also to encourage those companies that have yet to engage in the practice of sustainability reporting to start to report that data and information to their investors and stakeholders.
For me, what distinguishes this third wave is a focus on quality. And that’s why, I think, a lot of governments and regulators around the world have really stepped up to fundamentally improve the quality of sustainability disclosures, to ensure better comparability and to ensure, frankly, that companies are doing what they are saying they’re doing—and to address criticisms of greenwashing. I think that’s the intent of this third wave. So, we've moved from a voluntary reporting framework to very much an involuntary reporting framework.
DS: Tell us a bit about where we are with that involuntary regulatory environment. What kinds of things are companies facing?
AK: Number one, it’s a lot of education. I think a lot of companies are really trying to understand what they need to do versus what’s “nice” to do. A lot of companies are trying to understand various reporting frameworks. And what we recommend is to leverage some of the interoperability. The reality is that what California is doing is very aligned to what other countries are doing in terms of climate-related disclosures. [For example,] if you’re required to comply with the Corporate Sustainability Reporting Directive in the EU, there is a lot of overlap with other reporting frameworks.
And while there has absolutely been substantial growth in the number of these regulations and reporting requirements, the reality is there is a lot of overlap. And companies should do what they can to take advantage of that overlap, so they aren’t duplicating efforts and, fundamentally, are lowering their compliance costs.
DS: We’ve talked a bit about ESG and sustainability as a value-creation opportunity. How should boards think about this, and what role should boards play in emphasizing value creation and sustainability?
AK: Boards have a really critical role to play. The board’s role is of course advisory and to provide overall governance over an organization, and certainly a key aspect of that is looking at a company’s strategy. If a company is establishing some form of decarbonization plan, surely you should be leveraging the various tax credits and incentives that are out there to decarbonize on a cost-effective basis. And that’s the type of thinking a board can bring to the discussion.
When it comes to value creation, the data strongly suggests that companies that really embrace sustainability see an improvement in financial performance over the long term. I’ve often thought about why that might be the case. And I think it comes down to, fundamentally, the fact that companies that think about the bigger picture, think about their stakeholders and their stakeholder ecosystem, are more strategic companies. They are thinking much more holistically. And accordingly, they have enhanced risk management practices as well. So, for all these reasons, we do see that relationship between sustainability and corporate financial performance.
And in most cases, these are companies that are better governed and more strategic in their thinking. That’s the type of role I think boards can play in helping a company think more holistically about their strategy and to encourage companies to think about the long term.
DS: RSM recently conducted a survey on middle market companies. How are those firms approaching ESG?
AK: In our most recent sustainability survey, we found that middle market companies are embracing ESG. It was something like 75% of middle market companies have [taken steps to prepare for compliance], based on survey results. And we’re seeing a few interesting trends. Number one, obviously a lot of middle market companies are looking very carefully at the regulations and seeking, of course, to align to that. Number two, partly because of the regulatory environment but also frankly because of other stakeholder concerns, a lot of middle market companies are seeking to develop processes and implementing technology to fundamentally improve the quality of their sustainability disclosures and reporting.
I think that’s an important point because the regulatory environment also imposes, in most cases, some form of audit or assurance requirement on the company’s ESG or sustainability disclosures. So, middle market firms are thinking carefully about the control environment around their disclosures and embedding technology as well—not just to improve the quality of financial disclosures but to reduce the costs of compliance.
I think there are a lot of really interesting technology solutions out there that can help middle market firms and other firms thread this needle around decreasing compliance costs, improving the quality of disclosures, and making audit and assurance processes more straightforward.
