Despite 87 per cent of leaders surveyed in KPMG‘s latest index claiming to integrate ESG data systems with financial reporting systems, only 25 per cent of companies feel they have the ESG policies, skills, and systems in place to be ready for independent ESG data assurance.
The report, Road to trust: KPMG ESG Assurance Maturity Index 2023, shows that 75 per cent of companies globally feel they have a long way to go to be ready to have their ESG data assured. Especially as the deadline for new regional and international sustainability reporting standards looms.
The index captures the views of senior executives and board members at 750 companies across industries, global regions and revenue sizes. It measures the progress companies have made in key areas to gauge their relative maturity for being ‘ESG assurance ready’. Respondents were ranked as either leaders (top 25 per cent), advancers (next 50 per cent), or beginners (bottom 25 per cent) based on their maturity.
ESG assurance ready
Notably, the report reveals that companies valued at over $10billion tend to be more ESG assurance-ready, with an average score of 56.3 (on a 0-100 scale). Meanwhile, organisations with $5-10billion scored 45.3 on average and those under $5billion scored 41.7.
Geographically, the ESG assurance readiness of companies is relatively close between the highest-ranking countries. Taking top spot is France (50.4), with Japan (50.0) and the US (49.4) filling out the remaining top three. Meanwhile, the lowest-ranking countries are Brazil (43.1) and China (43.0).
Leaders ranked more than three times higher than other respondents (50 per cent to 14 per cent) for having processes and controls documented, in place and tested for environmental data, with similar leadership for governance data (52 per cent to 19 per cent) and social data (45 per cent to 16 per cent). Eighty-seven per cent of leaders are integrating their ESG data systems with financial reporting systems to gain the benefit of consistent financial controls over non-financial data, compared with only 35 per cent of others.
“Being ESG assurance ready means identifying the relevant regulatory framework and having the right metrics with robust systems, processes, controls and governance for collecting and managing the data,” said Larry Bradley, global head of audit, KPMG. “Putting those preconditions in place now, in advance of the 2024 reporting cycle, will give companies an advantage not only when it comes to meeting new requirements but capturing the benefits of ESG assurance as well.”
Road to ESG maturity
From the survey, just 52 per cent of respondents are obtaining some level of external assurance over their current ESG disclosures. Of those just a fraction are obtaining reasonable assurance (14 per cent) or limited assurance (16 per cent) over all of their ESG disclosures that will be required under incoming regulations. This signals that there is still more progress to be made on their ESG assurance maturity journey.
“While most companies have been doing some voluntary reporting on sustainability issues, they typically didn’t subject that reporting to the same rigour, controls and oversight that will be needed to meet the new regulatory requirements to be assured,” said Mike Shannon, global head of ESG assurance, KPMG. “Now there will be regulatory and assurance requirements to report accurate information, which raises the bar on controls and processes as well as qualitative statements that will need to be made around the data.”
Five critical steps
The report identifies five critical steps that leading companies are taking to become ESG assurance-ready:
- Determining applicable ESG reporting standards
- Building robust ESG governance and developing the right skills
- Identifying the applicable ESG disclosures and necessary data requirements
- Digitising ESG data processes and ensuring high quality data
- Working with the value chain to collect ESG information
Robust governance sets the foundation for becoming ESG assurance-ready. For leaders, not only is ESG a CEO priority and on the board’s agenda, but more than half (53 per cent) say their board is knowledgeable about their company’s ESG assurance issues. This is compared to just 28 per cent of less ESG-mature respondents.
It is also notable that at firms that are less ready for ESG assurance, 58 per cent of CEOs and board members say it is challenging to balance ESG assurance goals with the profit expectations of shareholders. Yet about half of all respondents (54 per cent), and CEOs and board members notably (47 per cent), say that ESG assurance can increase market share. Especially as the company’s values become more aligned with like-minded customers and investors.