Demonstrating the impact of non-financial information management in generating value over time and in managing the associated risks is an asset in the market.
In order to carry out more effective sustainability reports, it is necessary to identify which ESG topics and data are really relevant for the organization and its stakeholders. From that, setting the appropriate criteria to link the information to the organization's economic and financial performance. It is recommended to use reliable bases, through internally defined metrics or using nationally and/or globally recognized guides/frameworks.
Among the recommendations mentioned, the use of frameworks with global recognition stands out, since the benefits are expanded in the sense of:
The apparent novelty and movement around the acronym is raising doubts about how to adapt to this “new demand.” But, in fact, ESG is not an evolution of corporate sustainability, but corporate sustainability itself seen and treated with a bias of greater interest to financial market players.
In this context, it is highlighted that ESG data are information related to risks, impacts and environmental, social and governance practices related to the organization's business. Each industry and business has its peculiarities and the first step is to identify which ESG data are most relevant to your business.
Some examples are:
Environmental
Social
Governance
It is important to emphasize that the approach of defining, managing, evaluating and reporting ESG information must include the impact of these aspects on the business and on the system in which the organization operates, directly or indirectly – sources of raw materials, suppliers, operation, distribution, customers, market, society, surrounding communities, among others.
Defining and integrating ESG aspects in the business can be carried out based on a basic flow of understanding and structuring that takes into account the priorities and the eyes of investors to guide your strategy.
What is the materiality of the company? In other words, what are the relevant topics for the company, considering the ESG aspects, business strategy, and perception of impacts of the audiences with whom it interacts? This is very much related to the purpose of the business. Why does it exist? What impact does it have and for whom? What does its existence promote in the world? And what is the company's will, intention, vision of the future? What legacy does it want to leave? How does it want to be remembered?
Who are your stakeholders, both those of legal, economic and financial interest, and the parties impacted by the company's operation? Who does the company impact? And who is it impacted by? It is closely linked to material issues, and it is necessary to develop communication channels with all of them. Observe and work on the wishes of the stakeholders, seeking a citizen action – adding social responsibility, not necessarily in a philanthropic way, but coherently with your business strategy.
What are your negative and positive ESG impacts and how do you act on them? It is necessary to minimize the negative ones by equating and mitigating any environmental and social damage, as well as taking advantage of the positive impacts and enhancing them as a way to add value.
Environmental, social and governance risks can also be material financial risks. So, it is important to understand what the risks associated with the business are, how they impact the company's numbers and act on them.
You have to find smart ways to demonstrate non-financial information. Assessing if there are forms of monetization and how best to demonstrate them. Making a selection of appropriate indicators, keeping track of and reporting on these relevant topics is important to demonstrate the business value and model.
In this way, ESG aspects are investment differential factors that may indicate companies with more resilient business models in the long term. This tends to influence the way asset managers and investors assess investment portfolios. To reinforce credibility, it is important that information is consistent and standardized across all channels that serve as a source of information for funds and investors to keep up-to-date on practices – the company's website; annual and periodic reports; reference form; websites of NGOs and governments; reports, research and regulations; news and social media; movements in society.
Sustainability indicators were commonly related only to social and environmental projects that companies developed, generally linked to image or compensation. However, a sustainable approach goes far beyond that.
For example, when we talk about environmental and social risks, we can also link them to relevant financial risks. According to Swiss Re, one of the world's largest insurance providers, global economic losses from natural disasters in 2020 amounted to US$190 billion. This is a reality with a tendency to worsen as the consequences of climate change escalate, but it can also be related to risks in the supply chain, occupational safety risks, among others that end up impacting the finances of organizations.
There are many challenges to effectively implementing sustainability into the business model, but the solutions often involve a new way of looking at the business.
By and large, the financial and accounting systems that support our economy are focused on financial results, which are clearly important but do not adequately reflect the dependence of our economic success on the health and stability of our society and environment.
The isolated approach to ESG aspects by the sustainability area may not reflect and meet the economic and financial expectations of partners, shareholders, and investors.
An effective analysis of the ESG theme and the impacts that these aspects have on the business requires multidisciplinary knowledge and responsibilities. And the finance and sustainability departments working together can develop an innovative, resilient and attractive business model for stakeholders and the market.
Through corporate reports, companies disclose their socio-environmental commitments and actions, their impacts and risks associated with the business and their management of them, demonstrating their commitment to generating value throughout their operations, in addition to being transparent to the market and stakeholders.
Currently, the Sustainability Report is the format used by most companies to communicate their dealings with ESG aspects. The structure most used as a basis for managing and disclosing these aspects is the GRI (Global Reporting Initiative), and other frameworks such as the Climate Disclosure Standards Board (CDSB), the Carbon Disclosure Project (CDP), Sustainability Accounting Standards Board (SASB) have been gaining ground.
For most companies, the decision to publish the Sustainability Report results from a combination of three main factors:
The Integrated Report is more than a report on sustainability. It is a process for generating corporate communication that contributes to the integrated business management. This takes into account the impacts on the resources it uses and the risk control. The main purpose of this disclosure is to explain to stakeholders, especially financial capital providers, how the organization generates value over time. Therefore, it must contain ESG information directly connected to relevant topics and the company's economic and financial aspects.
In practice, we have observed that few companies publish the integrated report today, because it is a more demanding process. A restructuring of processes and indicators is needed, a new way of thinking about the business, which allows for the integration of non-financial and financial information. The report is a consequence of this restructuring, which should contain the link to the ESG information with the following topics:
Internationally, the benchmark initiatives to implement the ESG aspects in the organization are: Global Reporting Initiative (GRI) - GRI Standards, International Integrated Reporting Council (IIRC), Sustainability Accounting Standards Board (SASB), Carbon Disclosure Project (CDP), and Climate Disclosure Standards Board (CDSB).
In Brazil, we highlight the main initiatives for sustainability reporting and integrated reporting:
Effective January 1, 2006, it is a non-mandatory statement, used as supplementary information to the financial statements and notes. This standard establishes procedures for disclosing information of a social and environmental nature, aiming at demonstrating to society the entity's participation and social responsibility.
The legislation requires the annual disclosure of an integrated or sustainability report of a publicly traded companies or government controlled private company.
The TCU regulations, on the other hand, require the inclusion of an integrated report in the rendering of accounts of state-owned entities delivered to the Federal Account Court.
Issued on January 19, 2021 by the Accounting Pronouncements Committee (CPC) as a guide for preparing the Integrated Report, it was approved by the Federal Board of Accounting (CFC) at CTG 09. It makes a correlation to the Basic Conceptual Framework for Integrated Reporting, prepared by the IIRC aiming at formalizing in Brazil, by the CPC and CFC, the Integrated Reporting framework already widely used globally.
It decided that public corporations that opt for the preparation and disclosure of the Integrated Report must comply with the requirements of Guideline CPC 09. In addition, it informs that the report must be submitted to the limited assurance process carried out by an independent auditor, registered with CVM (Brazilian Securities Commission). This resolution is in force for reporting with a base year from 2021 onwards.
In December 2020, the CMV placed in public hearing a proposal for changes to Instruction 480, which provides for the registration of issuers of securities admitted to trading on regulated securities markets.
The main objective of the proposal is to reduce the cost of regulatory compliance for securities issuers and to include ESG information such as:
Issued by the Federal Board of Accounting and approved by the Institute of Independent Auditors of Brazil, it is equivalent to the international standard ISAE 3000, issued by the International Federation of Accountants (IFAC). Used to ensure sustainability reports, as it is the standard that best suits this need, having as an audit market practice the use of the limited assurance option.
Approved in CFC Resolution No. 1407/12 based on CT IBRACON No. 07/2012, in force since September 21, 2012. This is to guide the independent auditors on the execution of work and the issuance of assurance reports on information related to sustainability and social responsibility.
Assurance Engagements on Greenhouse Gas Statements - Approved in March 2012 by the International Auditing and Assurance Standards Board (IAASB), addresses assurance of reporting on greenhouse gases (GHG). There is still no correspondence in the CFC.
The International Auditing and Assurance Standards Board (IAASB) is conducting a public consultation on the project to develop a guide for ensuring sustainability reporting, referred to as “Extended External Reporting (EER) Assurance.”
The EER Assurance project, approved in October 2017 by the IAASB, aims to enable a more consistent and appropriate application of ISAE 3000.
With this, the auditors will have a reference in those areas where challenges are normally encountered in applying ISAE 3000, so that they can help them in the solution, so that EER users have greater confidence in the assurance results.
As Brazil has adopted the international auditing standard issued by the IAASB, CFC is expected to issue the equivalent pronouncement to EER Assurance as soon as approved.
Taking all these aspects into account, structuring data and reporting properly – without subjectivities to the market – organizations become more attractive for attracting investments, especially those aimed at sustainable projects, taking advantage of the growing movement of the Sustainable Finance concept.
All this transformation in the financial market ends up pushing the business industry to move in the same direction, which was also revealed in the International Business Report (IBR) – Grant Thornton Sustainability, where 89% of Brazilian business leaders consider themselves more aware of ESG practices, more than 70% consider the impact to be positive, sustainability in business and 53% believe that environmental, social and governance habits can open up new sources of financing at lower rates.
There are several opportunities, it remains to be seen what stage your organization is at and what are the best strategies for the near future.
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