Rising Concerns: EY Research Reveals Doubts in Nonfinancial Reporting & ESG Commitments
As the call for transparency in environmental, social, and governance (ESG) practices intensifies, a recent survey by Ernst & Young (EY) uncovers a troubling reality - both investors and finance leaders are increasingly skeptical about the credibility of nonfinancial reporting. This growing skepticism, exacerbated by perceptions of greenwashing and inconsistent data, highlights the critical role that ESG and governance, risk, and compliance (GRC) professionals must play in elevating reporting standards.
The 2024 EY Global Corporate Reporting Survey, which surveyed over 2,000 finance leaders and 815 institutional investors worldwide, shows a notable shift in investor expectations. More than two-thirds (69%) of finance leaders report that investors are asking more questions about nonfinancial drivers of value than they did just two years ago. This trend underscores the increasing importance of integrating nonfinancial risks and opportunities into corporate value creation and reporting.
However, there is a disconnect in communication: while over half of investors express satisfaction with how they articulate strategic issues critical to long-term value, only 44% feel they provide clear guidance on assessing companies against these priorities. This gap presents a significant opportunity for GRC professionals to engage more effectively with investors, ensuring that sustainability strategies are not only communicated but also well understood.
Doubts Over Achieving Sustainability Targets
Despite the heightened focus on sustainability, fewer than half (47%) of finance leaders believe their organizations are "very likely" to meet major sustainability priorities, such as achieving net-zero emissions on time. This skepticism highlights the need for finance and GRC professionals to reset their sustainability commitments into more realistic and actionable plans.
Additionally, greenwashing concerns loom large, with more than half (55%) of finance leaders worried that sustainability reporting in their sectors may be perceived as misleading. The findings from the EY Global Climate Action Barometer further emphasize this risk, indicating that companies may face heightened scrutiny and potential litigation from stakeholders if they fail to substantiate their sustainability claims.
Building trust in nonfinancial reporting is crucial for mitigating investor concerns. A staggering 96% of finance leaders report encountering issues with the nonfinancial data they receive, citing varying data formats (39%) and inconsistencies (35%) as primary challenges. As such, GRC professionals must champion efforts to standardize reporting processes and strengthen the credibility of sustainability disclosures.
Moreover, nearly three-quarters (78%) of investors believe that new reporting regulations and standards will enhance the accuracy and comparability of companies’ sustainability disclosures. This regulatory landscape provides an avenue for finance leaders to align their reporting practices with emerging standards, ensuring that they meet stakeholder expectations while maintaining compliance.
Embracing AI for Enhanced Transparency
As businesses continue to navigate the complexities of ESG reporting, leveraging technology will be paramount. More than half (57%) of investors expressed that an AI tool capable of assessing the credibility and accuracy of a company’s data disclosures would be "very useful." However, only about one-quarter (26%) of finance leaders regularly involve younger team members in driving transformation efforts, indicating a potential missed opportunity for innovation.
To build robust technology foundations and take a human-centered approach to finance transformation, organizations must invest in high-grade technology suites for data management and analysis. Currently, fewer than one-third (32%) of finance leaders report having the necessary tools in place to effectively manage nonfinancial data.
In this challenging environment, ESG and compliance professionals play a vital role in navigating the complexities of nonfinancial reporting and sustainability commitments. By focusing on three key priorities:
- Creating Sustained Value in a Changing World: Professionals should integrate nonfinancial risks and opportunities into their value propositions and articulate clear narratives that resonate with investors.
- Cutting the Reporting Confidence Deficit: By standardizing nonfinancial reporting processes and ensuring the accuracy of disclosures, GRC professionals can help rebuild trust with stakeholders.
- Transforming Finance Analytics in the AI Era: Leveraging advanced analytics and AI tools will be crucial for enhancing the transparency and credibility of sustainability claims.
As the demand for transparent and reliable ESG narratives continues to grow, finance leaders must rise to the occasion. By addressing these challenges head-on and fostering a culture of accountability and transparency, they can position their organizations for sustained success in an increasingly scrutinized market.
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