Only 1 in 4 companies are at advanced stages of preparation to obtain independent assurance on their reported ESG information, even though 66% are required to disclose ESG data or expect to be soon – including 78% of listed companies – according to a new survey released by global professional services provider KPMG.
For the study, KPMG surveyed senior executives and board members at 750 companies across a broad range of sectors and regions, with average company revenue of $15.6 billion, and launched the ESG Assurance Maturity Index, gauging progress companies have made in ESG policies, skills, systems and value chain data to prepare for ESG assurance.
The study comes as companies increasingly face regulatory, as well as stakeholder, pressure to report on an increasing range of ESG-related information, with many new and emerging disclosure systems, including the EU’s CSRD and U.S. SEC’s climate-related reporting rules, also requiring companies to obtain independent assurance on their sustainability reporting, similar to requirements for financial disclosure.
Maura Hodge, ESG Audit Leader at KPMG U.S., said:
“Assurance requirements are here. Soon, third-party assurance will no longer be a nice to have; it will be table stakes. While there are some larger companies that have been working to get ESG assurance ready, most companies haven’t built out much of the infrastructure that they need to have their ESG data assured. Now is the time for companies to establish their processes and become assurance ready.”
The KPMG study found that 75% of companies were still in the early stages of ESG assurance preparedness, despite the pending regulatory requirements, across a range of key factors including governance, skills, data management, digital technology and value chain, with even the top 25% of identified “Leaders” having significant work ahead to become ESG assurance ready. The study indicated that 56% of companies are publicly reporting ESG data, and while 93% of these are providing some level of external assurance, only 14% are obtaining reasonable assurance, and 16% limited assurance.
The report found differences in readiness by company size, region and sector, with larger firms (revenue above $10 billion) scoring well ahead of their smaller peers, North American and European companies outperforming those in Asia Pacific and Latin America, and the highest scores by industry in the Energy & Natural Resources and Manufacturing sectors, and the lowest in Technology & Telecommunications and Life Sciences & Healthcare.
While regulatory pressure, reported by 64% of respondents, is clearly the top driver for companies to obtain assurance over their ESG disclosures, the survey found executives anticipating a wide range of benefits from having their sustainability data assured, including 54% anticipating greater market share as customers and investors look to align their values with their consumption and investment decisions, as well as expectations for improved profitability, and decision making, greater innovation, and stronger reputation.
The study examined the top challenges experienced by companies in preparing for ESG assurance, with the most frequently cited by respondents including high initial costs and a lack of internal skills and experience (each reported by 44%), followed by a lack of clarity and evolving regulations (42%), inadequate supplier ESG performance (42%), insufficient IT or digital solutions (39%), and a lack of clear metrics or measurement tools (36%).
One of the primary hurdles to assurance readiness identified by the report was the establishment of an audit trail, or a record to trace accounting, trade details and non-financial data to their source to ensure the reliability and transparency of reported data. According to the survey, 74% of respondents acknowledged that they lack a clear audit trail for non-financial ESG information.
The collection of the required information also remains a significant barrier, with ESG data needing to be collected from a much wider range of disparate systems than financial data, and many companies facing requirements to report on a broad set of factors including environmental criteria and social data. The report found that currently, just over half of companies currently collect Scope 1 and 2 emissions data, only 36% capture Scope 3 data, and less than half capture data on metrics including the impact of workforce diversity and inclusion on employee retention, and pay equity.
In the report, KPMG International’s Larry Bradley, Global Head of Audit, and Mike Shannon, Global Head of ESG Assurance, said:
“To gain investor and stakeholder confidence and mitigate the risk of greenwashing, ESG reporting should be subject to a level of scrutiny comparable to the financial information that users depend on. This means that companies need to invest in and improve data quality by applying disclosure control and risk frameworks akin to those used in financial reporting.”
Click here to access the report.