How to eliminate distrust in ESG reporting?

Although companies continue to invest time and resources in their sustainability efforts, there is still a significant disconnect between expectations and objectives when it comes to their corporate reporting. This particularly concerns environmental, social and governance (ESG) disclosures. Since it is a framework for companies to report and be evaluated in the three mentioned areas.



ESG reports help companies and their stakeholders (consumers, suppliers, shareholders, investors) communicate and evaluate their performance against risks and opportunities in multiple dimensions. It is therefore vital to address distrust in ESG reporting, which threatens to undermine efforts and opportunities to be attractive for investment and the collective fight against climate change.



Importance of ESG reporting

There is a strong belief that reporting that covers a company's operations in all three areas: environmental, social and corporate governance, are agents that directly propagate fundamental business transformation that leads to greater corporate sustainability.



"ESG reporting helps investors avoid companies that may present greater financial risk due to their environmental performance or other social or government practices."



Green Business Bureau.

The EY Global Corporate Reporting Chile Mobile Number List and Institutional Investor Survey ( 2022 ) explores how to eliminate distrust in ESG reporting. This is done through a survey methodology of 1,040 financial leaders of companies that issue reports and 320 institutional investors as users of these disclosures.





Major issues in ESG disclosures

According to the study, there are three main challenges that companies have to address when preparing their ESG reports:







The disconnect between companies and investors when it comes to maintaining a focus on long-term value creation and sustainable growth.

The importance of effective corporate reporting could be key to building alignment and understanding. But investors say current ESG disclosures do not meet their requirements and expectations.

Understanding expectations to close this gap. As research suggests companies need to better understand investors' long-term sustainability expectations. As well as gaining their trust by defining and focusing what the participation of financial leaders in ESG disclosures will be.

The above understanding that, for both companies and investors, a long-term vision is inseparable from sustainability considerations. But when it comes to the trade-off between short-term profits and long-term value creation, there is a disconnect between investors and financial leaders. This is because it is more likely that, while investors lean towards decisions that lead to generating long-term value, financial leaders are less convinced to make that trade-off.



“More than three-quarters of investors surveyed think companies should make investments that address ESG issues relevant to their business, even if they reduce short-term profits.”



EY Global Institutional Investor Survey (2022) .

The fact that investors are not aligned when it comes to long-term value trade-offs could create issues in sustainability performance and ESG reporting. So how should financial leaders address distrust in ESG reporting to regain investor support and get both parties on the same page of generating long-term value?


Recall that a company's sustainability disclosures are one of the important insights investors use to understand the impact of sustainability issues on performance, risks and long-term growth prospects.



In fact, 99% of investors surveyed in the study reported using companies' ESG disclosures as part of their investment decision-making. This includes 74% who use a rigorous and structured approach. This represents a significant increase, as in the 2018 EY Global Institutional Investor Survey only 32% of investors surveyed used a rigorous approach.