On ESG, Finance Leaders and Investors Can Find A Common Ground of Trust

Facing pressures from many stakeholders, finance leaders in the US have been forced further into nonfinancial realms, grappling with how to quantify and reliably report environmental impacts. Regulators are increasingly likely to mandate this information in public filings, and various investor types are demanding it — yet clearly defined and widely applicable standards have proven elusive. And while companies say they are accelerating their efforts, EY research reveals a sobering counterpoint: investors say they still aren’t getting the reporting and data-driven insight they require. 

This chasm between finance leaders and investors remains wide even as environmental, social and governance (ESG) topics have rocketed up boardroom and regulator agendas, with the US Securities and Exchange Commission working toward a final rule on climate change disclosures, for example. Without greater alignment, our organizations will likely struggle to assess performance against strategic risks and opportunities — and, more broadly, the health of our capital markets and our planet may be challenged. 

How can finance leaders get more impact out of the time, resources and leadership effort they’re increasingly required to spend in this area, and end this frustrating disconnect with investors? And how do they improve data quality, strengthen controls and data collection, and update review processes for an array of stakeholders with different priorities? To find answers, we surveyed about 200 senior finance leaders and institutional investors in the US (part of a larger effort involving about 1,400 respondents globally). What they told us shed light on the driving factors behind this corporate reporting trust gap — as well as potential solutions for bridging it.  

Similar goals, but separate mindsets? 

Sustainability must be a long-term responsibility, even as more immediate concerns crowd into the outlook. When should plans yield to the demands of the present? Among US investors, 76% agree that the companies they invest in should address ESG issues relevant to the business, even if doing so reduces short-term financial performance and profitability. By contrast, just 38% of finance leaders in the US agreed with the same statement — the lowest percentage of any country or region we surveyed. (Globally, 78% of investors and 55% of finance leaders agreed on average.) 

Yet 38% of US finance leaders say this short-term earnings pressure manifests itself from investors, impeding longer-term investments in sustainability. This is the same percentage as those who agree that major investors are putting even more scrutiny on ESG goal performance, which is expected to be increasingly key to accessing capital markets. Many finance leaders likely feel that they’re being torn in two directions — that the “duality of growth” has doubled the stakes across today and tomorrow. 

For their part, 81% of US investors told us that too many companies fail to properly articulate the rationale for long-term investments in sustainability, which can make it difficult to evaluate the investment. The same percentage say that their organizations have accepted a lower rate of return on investment when target companies have a beneficial impact on planet or people — primarily because high-scoring ESG companies have better growth potential over the long term (the most frequently cited reason among six to choose from). 

So, it’s no surprise that 74% of US investors told us that they usually conduct a structured, methodical evaluation of nonfinancial disclosures (and the rest evaluated the disclosures informally). That’s a stark contrast to our 2019 survey, in which just 32% of investors globally said they used a rigorous approach. Yet they aren’t especially encouraged by what they see: 73% felt that organizations have largely failed to create more enhanced reporting, encompassing both financial and ESG disclosures, which is critical in decision-making. About the same percentage believed that companies were highly selective in what they reported, raising questions about potential greenwashing. And 94% agreed that, unless there is a regulatory requirement to do so, most companies provide only limited decision-useful ESG disclosures — a figure that puts the US higher than all the other regions surveyed. 

Trust and transparency can bridge this gulf 

Despite the differing perspectives, both US investors and finance leaders agreed on the main hurdles: they find that the focus on material issues that really matter, supporting evidence and assurance for the data, and forward-looking disclosures are all lacking. 

Two key actions can drive alignment — first, setting expectations about what really matters within ESG disclosures. Our research reveals three elements that are core to generating a deeper understanding between companies and their investors: 

• Focus: As investors prioritize their portfolios around net zero, companies should dive deep into the important opportunities and risks, including transition risk, physical climate risk and climate scenario analysis. 
• Accountability: Robust governance and board oversight around sustainability are vital for advancing ESG pledges into progress and results. ESG stewardship is a focus for investors, and they want to be engaged with leaders on sustainability goals and metrics. 

• Transparency: More consistent, comparable and reliable ESG disclosures are increasingly a must-have, not just because of investor pressure but also due to emerging global reporting standards and related assurance requirements. 

Secondly, finance leaders need to equip their functions with the enabling capabilities to bring these elements to life — and build confidence in the data being reported. Today, 25% of US finance leaders we surveyed said that their companies’ data is challenging to access, of variable quality and often relies on estimation; just 13% said that they have access to all information needed in a systematic, controlled reporting environment. Connecting the ESG agenda to broader strategic initiatives currently underway can drive high-level buy-in for finance transformations, accelerating data capabilities and more. 

Three qualities set finance functions apart in this disruptive era: 

• Smart: Shape your data strategy based on the vital use cases and current challenges. On that foundation, build an analytics capability that accesses relevant internal and external data sources and turns them into insight, relying on artificial intelligence and other tools. 
• Connected: Finance operating models should support collaboration across the organization to address wider enterprise goals, as well as extend outside the enterprise to complete tasks more dynamically. The goal is to flex more quickly in the face of volatility and disruption.  

• Talent-led: With new capabilities and an optimized operating model, a finance function may require more dynamic skills to meet changing demands. Many traditional responsibilities will remain important, but they need to unite with a more innovative and value-driven culture. 

Ultimately, finance leaders and their investors ostensibly have the same goals: long-term, sustainable growth when the nature of growth has been profoundly challenged. Through trust, transparency and engagement, these two groups can advance their mutual interests instead of perpetuating divisions. Investors should proactively connect with finance teams as part of a dialogue, and finance teams can continue to build out ESG reporting processes that further their goals and account for those of their stakeholders. 

This article was written by Marc A. Siegel who serves as the EY Americas Corporate and ESG Reporting Leader and is a former Sustainability Accounting Standards Board (SASB) board member. The views expressed are those of the author and do not necessarily reflect the views of Ernst & Young LLP or any other member firm of the global EY organization.