Companies’ commitment to reflecting more widely on environmental, social and governance (ESG) factors in their annual reports is increasing significantly, both in the UK and globally, but there are areas which require improvement, according to two research reports
Deloitte’s analysis of 50 year-end reports across the FTSE 350 found that over three quarters (78%) set out a clear purpose beyond making profit for shareholders, up from 57% in 2019.
These companies included a purpose statement which went beyond discussing only financial drivers, reported on ESG factors and described impacts that relate to wider stakeholder groups.
Almost all companies surveyed (90%) explicitly cited climate change in their annual reports, with 22% identifying it as a stand-alone principal risk and 24% as part of a broader risk.
In response to changes in regulatory requirements in this area, a majority of companies (74%) identified employee-linked metrics within their KPIs.
Almost all boards (90%) described the mechanisms they use to monitor company culture – most commonly, for 76% of cases, in the form of an employee engagement survey.
However, although 50% of companies identified board-level targets for gender diversity, only a minority of those companies also identified targets for ethnic diversity, with 12% of companies disclosing broader workforce objectives relating to ethnic diversity.
Veronica Poole, global IFRS leader and UK head of corporate reporting at Deloitte, said:
‘During the Covid-19 pandemic, we have seen how quickly ESG matters can affect financial returns. ‘It’s therefore unsurprising to see ESG factors feature high on the list at board-level and we expect this trend to only ramp up.
‘Investors are looking for greater insight into how companies deliver sustainable value over time and other stakeholders’ voices are becoming louder in demanding accountability, clear measurement and reporting that demonstrates this.
‘The Black Lives Matter campaign and climate change related activism are clear examples where civil society is looking for business to step up.’
Task Force for Climate-related Financial Disclosures
Deloitte found that that around two thirds of the reports it analysed (64%) made reference to the Task Force for Climate-related Financial Disclosures (TCFD) established by the Financial Stability Board (FSB) – with 22% making disclosures in line with TCFD.
The TCFD has published its 2020 Status Report, showing more than 1,500 organisations worldwide have expressed their support for its recommendations, representing an increase of over 85% since the 2019 status report.
Nearly 60% of the world’s 100 largest public companies support the TCFD, report in line with the TCFD recommendations, or both.
However, in its review of 1,700 companies’ reports globally, the TCFD said there needed to be more progress in improving levels of TCFD-aligned disclosures given the urgent demand for consistency and comparability in reporting.
In particular, disclosure of the potential financial impact of climate change on companies’ businesses and strategies remains low.
On average across the TCFD recommendations, 42% of companies with a market capitalisation greater than $10bn disclosed at least some information in line with each TCFD recommendation in 2019, and over 50% met disclosure requirements related to strategy and climate-related metrics.
Mary Schapiro, head of the TCFD secretariat, said: ‘Investors are increasingly demanding climate-related disclosures from the companies they invest in, and this demand is driving global momentum around the TCFD recommendations across financial and non-financial sectors.
‘We have provided a foundation that is improving the quality and consistency of this type of disclosure, and may help encourage a standardized approach across sectors and regulatory jurisdictions.’