Did you know that there is a significant disconnect between investors and finance leaders when it comes to the trade-off between short-term earnings and long-term value creation? While investors prioritize long-term value creation, even at the expense of short-term earnings, finance leaders are less inclined to make that trade-off. This disconnect creates a gap in perceptions of sustainability performance and corporate reporting between companies and stakeholders.
Companies often face short-term pressure from certain investors, focusing on meeting their expectations, while investors feel they do not receive robust insight into a company’s long-term growth strategy. To bridge this gap, finance leaders need to align with investors and stakeholders on ESG (Environmental, Social, and Governance) disclosures within corporate reporting.
By incorporating advanced analytics and insights into ESG reporting, companies can enhance sustainability, improve investor confidence, and drive long-term value creation.
The Importance of ESG Disclosures in Corporate Reporting
Investors heavily rely on companies’ ESG disclosures when making investment decisions, with 99% of investors surveyed utilizing ESG disclosures in their decision-making.
However, investors feel that companies have failed to create enhanced reporting that encompasses both financial and ESG disclosures. Investors want more consistent, comparable, and reliable ESG disclosures to inform their investment decisions.
Lack of transparency in reporting raises concerns about greenwashing, and investors believe that most companies provide limited decision-useful ESG disclosures unless there is a regulatory requirement to do so.
Climate disclosures are of particular interest to investors, and there is a demand for companies to provide meaningful commentary about the challenges they face and to conduct scenario analysis.
Priorities for Transforming Corporate Reporting and Building Trust
To build trust with shareholders and stakeholders, companies need to prioritize aligning with investor expectations and focusing on long-term value creation. This includes addressing investors’ priorities such as net-zero alignment, robust governance, and more consistent, comparable, and reliable ESG disclosures.
The involvement of finance leaders in ESG reporting is crucial for building stakeholder confidence. Finance leaders should connect sustainability and finance functions, ensuring a clear understanding of data challenges and use cases, building analytical capabilities, and adopting a next-generation finance operating model.
To address investor expectations, companies should prioritize focus, accountability, and transparency in their reporting. This involves providing insight into opportunities and risks, meeting governance requirements, and responding to calls for enhanced sustainability disclosures.
The Way Forward: Embracing Transparency in Corporate Reporting
For companies to be seen as long-term focused and trusted by shareholders and stakeholders, sustainability must be embedded into their business models in a systematic, strategic, and rigorous way. This requires a commitment to transparency in corporate reporting.
Transparency is crucial in building trust and closing the stakeholder disconnect. Companies should effectively communicate progress on material sustainability issues and opportunities, ensuring that their reporting aligns with emerging standards. In addition, providing third-party assurance of disclosures can further enhance transparency and credibility.
To achieve this, companies need to define the involvement of finance leaders in ESG reporting. By connecting sustainability and finance functions, companies can foster a deeper understanding of data challenges and use cases. Adoption of smart, connected, and talent-led strategies in the future of finance will also play a vital role in driving transparency and improving corporate reporting.
By addressing these priorities and embracing transparency in corporate reporting, companies can bridge the ESG reporting gap, enhance sustainability practices, and ultimately bolster investor trust. This will lead to stronger relationships with shareholders and stakeholders and position companies for long-term success in an increasingly ESG-focused investment landscape.
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