As most firms now submit annual sustainability reports, decision-makers are increasingly embedding ESG in business decisions. This means that executives need to quantify and disclose the influence of ESG factors on financial decisions, which will protect the accuracy and integrity of their sustainability and financial reporting. To provide insights into this challenge, research firm Verdantix evaluated 20 Fortune 500 organizations that are globally recognized for their sustainability commitments, revealing the best practices on how to integrate ESG and financial reporting.
Three of the key lessons from this report are that:
- Financial metrics must be in line with sustainability metrics.
As a resilience strategy, firms should address the likelihood and magnitude of ESG risks in the context of their financial performance, specifically identifying the material impact on business operations. During this process, organizations might embark on transformational processes that generate opportunities for risk mitigation, efficiency and innovation. Firms with leading sustainability performance have enhanced these processes by breaking down information silos, centralizing sustainability data and developing metrics that reflect the social and environmental dividends of operations. As an example, firms such as Alphabet and Iberdrola disclose the economic impact of their operations in terms of job creation. For these businesses, connecting ESG and sustainability objectives and impacts with financial performance is a long-term value process that generates innovation, resilience and financial health. - Firms need to explicitly connect investment and spend with ESG objectives and principles.
ESG goals need strong board-level engagement and buy-in from different teams, with a range of departments approaching ESG and sustainability issues from their own perspective and scope. In integrated reports, firms should disclose how they consider ESG in their investment and market positioning strategies. For example, leading organizations such as Vestas – which operates in the energy and utilities sector – may disclose R&D spend as a support of corporate commitment to sustainability. Additionally, firms such as Apple and Samsung highlight their strong approach to ESG and sustainability principles, often expanding the scope of their sustainability reports to cover the influence of ESG issues on related economic expenditures such as lobbying activities and taxes paid. - ESG and financial reports should reflect executives’ accountability.
Sustainability plans do not survive without transparent reporting. Hence, firms should avoid any contradictions between financial and ESG reporting that would result in greenwashing accusations. This can be done by disclosing board and executives’ incentives and accountability against sustainability performance. For example, AstraZeneca discloses internal processes for executive remuneration based on net zero and sustainability targets. Also, firms aiming to have the highest reporting standards must verify ESG and financial performance, making independent ESG assurance critical to protect organizations’ compliance, credibility and integrity.
While specific strategies to integrate ESG and financial performance will vary across different industries, these steps remain crucial for all organizations to provide a pragmatic and transparent view of ESG performance. Ultimately, decision-makers must bear in mind that ESG and financial reporting are symbiotic reflections of overall business health.
