Learning to Love Transparency

The post-COVID imperative requires much better ESG reporting and disclosure. CEOs and their executive teams should focus on five short-term priorities.

Transparency took on a whole new meaning last year as COVID-19 swept the globe. At the start of 2020, it would have been unthinkable in much of the world that individuals would opt-in to geographic location services that shared their whereabouts at all times. Yet by the end of the year, pop-up notifications on smartphone apps were warning people when they have been close to someone who tested positive for the coronavirus.

Now, the transparency imperative stretches from individuals to institutions, with rising pressure on companies to open up to stakeholders such as investors, suppliers, governments, customers and employees. The pandemic underscored the interconnectedness of global actors, exacerbated and exposed underlying economic and social inequalities, and raised sharp questions about how we will deal with climate change—the next global crisis. The private sector urgently needs to respond to these global threats, demonstrating to investors that it can build resilience to future shocks, and to society at large that it is committed to long-term, sustainable value creation and a carbon-neutral economy.

All of this will require more and better information—not just to improve transparency, but to drive change. By improving the quality of information out there, companies will empower stakeholders, including investors; the latter will reward companies that are delivering for society and managing environmental, social and governance (ESG) risks, and they can apply pressure to organisations that are not.

At the moment, the only thing we can know about a company with a high degree of certainty is its current financial performance. That is not nearly enough to meet stakeholder expectations today, let alone in the future.

Pressures for change

Already, investors are seeking better information. A full 88% of institutional investors say their firm monitors ESG indicators to inform investment decisions. This demand will only become more intense as the importance of robust ESG information grows. PwC analysis suggests that over the next five years, the total amount invested in ESG mutual funds in Europe could grow at a compound annual rate exceeding 25%. If companies want to access deep capital markets, robust ESG reporting is increasingly a condition of entry.

At the same time, proposals for greater disclosure of information beyond traditional financial numbers are coming from a broad range of stakeholders. Over the last year, the European Commission has begun revising its Non-Financial Reporting Directive, the International Organization of Securities Commissions (IOSCO) has set out its intention to accelerate the harmonisation of sustainability standards, and the US Securities and Exchange Commission (SEC) has amended its rules to enhance human capital disclosures. Consumers, employees and NGOs increasingly want to understand the impact companies have on society and expect to be able to find information they can trust.

This pressure for greater transparency comes together in the search to define common, objective and enforceable standards for non-financial information, a process which is still at an early stage. At the moment, there are myriad yardsticks for reporting everything from carbon footprint to gender diversity, all with different levels of ambition. At the very least, it is hard for users to map different frameworks onto one another, in order to make meaningful comparisons, and hard for companies to know which standards are most influential. It will be some time before there is a commonly agreed style of non-financial reporting comparable to GAAP in the financial arena—but we are moving in that direction.

There is also significant progress towards building trust in disclosures through assurance. Stakeholders expect financial information to be audited. The same need is present for equally important non-financial information.

Where to focus

The direction of travel is clear, but there is a lot of uncertainty about the precise path and the pace of change. Here are five issues for CEOs and executive teams to consider as they contemplate a more transparent future.

1. Engage the board. Growing pressure from investors and a wider set of stakeholders makes transparency a board-level issue. Reporting on how you create sustainable value is not a PR exercise; it is vital to maintaining the trust of investors, regulators, employees and customers. That is partly about ensuring the data is accurate, but it is also about ensuring that it is used to improve performance. Trust comes when stakeholders are convinced you are genuinely committed to creating sustainable value—both financial and non-financial.
2. Know your strategy. What stakeholders are demanding is transparency about what matters—not transparency about every nook and cranny of your business. That means each organisation will have its own reporting approach, which is likely to include a comprehensive baseline (such as the one recently proposed by the World Economic Forum/International Business Council) and bespoke metrics relating to your sector and specific business and stakeholder groups. With a cluttered reporting environment, it is important to make sure you pick the right standards to report against. Metrics and disclosures need to be significant for stakeholders—relating to material issues—and challenging enough to make compliance meaningful.
3. Think about systems, not just standards. Regardless of what standards the market ultimately chooses, make sure your company has the ability to gather and report non-financial data effectively. Doing this properly is much more than just a comms-led effort which results in the team publishing a CSR report. It means having the right data, controls, skills and assurance. Think in terms of systems, not metrics—a trustworthy number is just the tip of an iceberg, but the iceberg is required to keep it floating.
4. Use the same rigor you apply to financial data. It is already the case that non-financial metrics can be just as important as financial ones—think about how customer acquisition and stickiness numbers matter more than EBITDA for investors in many platform businesses. These companies are expected to report such numbers with the same rigor they do their financial numbers, and that is the approach that is needed for other non-financial information. A whole host of measures is integral to a company’s health.
5. Go digital. Transparency is enabled by providing data in flexible digital formats that third parties can process and use. We are on a journey from static PDFs on corporate websites to engaging formats, for both data and storytelling. Consumers already use aggregation apps to understand companies while they shop—in the future such apps will bring not just reviews together, but also objective information culled from digital sources. Companies that can’t supply it will suffer commercially. The same is true in the B2B space, where ratings agencies and others will draw more and more data into their algorithms.

The non-financial reporting revolution is coming fast, and 2021 will be crucial. Companies that are not prepared will lack access to capital, sacrifice value, suffer damage to their reputation and ultimately may end up falling foul of the law. Transparency leaders, on the other hand, will build trust among all stakeholders, differentiate themselves, enhance the effectiveness of capital markets and help society advance.

(Courtesy PwC. By James Chalmers Global Assurance Leader, PwC UK and Nadja Picard Global Reporting Leader, PwC Germany)