Op-ed by Scott Lane, CEO, Speeki.
ESG reporting will collapse over the next decade unless it stops penalising firms for making honest disclosures and rewarding those who don’t. With this in mind, businesses need to embrace another level of assurance that discourages firms from omitting key data from their reports.
As ESG reporting begins to take a back seat on the global corporate agenda, we must make it pay for firms that do continue to make disclosures.
Currently, the more honestly firms disclose their challenges, missed targets, and supply chain data – the more ammunition they hand to activists, litigants, regulators and investigative journalists. This has led to a point where it ‘pays’ to be economical with the truth.
However, this increase in selective disclosures poses a far greater risk than honesty. Firms are opening up the door for widespread greenwashing in the global business community, jeopardising the integrity of ESG reports.
Selective reporting
Let’s say a company sets a Scope 3 emissions reduction target of 30% by 2030. The report, in year three of that commitment, says that they are on track. The assurer reviews the calculation methodology and the underlying data. Everything checks out.
But crucially, the assurers don’t assess whether the baseline year was chosen because it was the highest emissions year available. The company might also have excluded the most significant categories of Scope 3 emissions on the basis that data is unavailable – which may be true, but also conveniently removes the most material exposures from scope.
As a result, the assurance opinion covers a carefully bounded version of the truth. And the company receives a document that says, in effect: what you chose to report, you reported accurately.
Trust-centred assurance
To combat this growing trend, the disclosure process needs redesigning. A new type of assurance – trust-centred assurance – is not designed to validate what was chosen for disclosure, but to make broader, more honest disclosure commercially safe.
Firstly, an independent party comes in at the materiality stage and challenges what is being left out of the report, not just what is reported. And rather than monitoring progress annually, assurers should monitor progress continuously. This means that material mid-year events can be disclosed promptly and from a position of strength.
But it’s not just timelines that need to change – assurers should be looking at the bigger picture. Beyond the data, they should look at whether the overall impression a report creates is accurate, not merely whether the individual figures are correct. The company’s governance needs assessing too, because management incentives could negatively impact the truthfulness of reporting.
Some companies might think that these are additional layers of red tape, but I believe they will gain a ‘confidence dividend’ that makes it pay to be honest. They can lower their cost of capital, reduce their attack surface, and in turn, protect themselves from any scandal of inaccurate disclosures.
But above all, the new assurance is urgently needed to prevent the collapse of ESG reporting standards.
Learn more at www.speeki.com.
