Three key takeaways on sustainability in corporate finance

A LinkedIn Learning course focused on environmental, social and governance (ESG) issues in corporate finance, led by two brothers – both Emeritus Professors of Business at Brigham Young University – provided a comprehensive insight about how companies were responding to regulatory pressure. 

Here are three key takeaways on ESG activity and reporting from the course. 

1. More and more companies are now carrying out sustainability activities, including reporting

There’s unquestionably a growing interest in sustainability. This may be because more stakeholders are interested in companies’ impact on the environment and people. Ten or twenty years ago, companies were only accountable to their owners or investors. Today, they’re more affected by market, social, and regulatory pressures. There’s a growing volume of legislation on sustainability and its reporting, helping customers and potential stakeholders make the right purchase or investment decisions. 

2. There are three main obstacles to sustainability reporting

There are challenges to sustainability reporting, and it’s difficult for stakeholders to get a complete picture for several reasons.

a. There’s no single, harmonized set of reporting standards

Companies are free to use different standards or create their own format, which makes it very hard to compare reports from different companies. It also allows companies to pick and choose what they disclose – and provides an unfortunate incentive to avoid disclosing anything about the more challenging aspects of sustainability.

b. There’s no mandatory independent audit or assurance process

This means companies can report what they please, without anyone checking or verifying the information. A company could lie about its activity without fear of a penalty. An annual audit would be expensive, which could hit small companies hard. This obstacle leads to a further problem: greenwashing. Greenwashing is the practice of making unsubstantiated claims about your sustainability activity to lead consumers and investors to believe that your products are more environmentally friendly than they are in reality.  

c. Some sustainability activities look good on paper, but are hard to put into practice

A good example of this is building a responsible supply chain. You may have the best of intentions, but it can be difficult to know or control what’s going on further up your supply chain in the context of tracing chemicals. However, it’s even more difficult for labor practices as these are less visible and leave no trace on the products. You are therefore reliant on your suppliers to tell you the truth, but they may not disclose their activity, or may not be aware of what’s occurring further up their supply chain. Switching to another supplier will also be expensive, and not necessarily any more reliable. 

3. The adopted European sustainability reporting standards will be a game-changer

The course explored several examples related to multinational or US companies, with a focus very much on the international position, so the professors didn’t mention Europe specifically. However, many of the obstacles identified throughout the course have been addressed by the recently adopted European Sustainability Reporting Standards (ESRS). These provide a standard and harmonized way of reporting, removing the difficulties of comparing reports between companies. 

The Corporate Sustainability Reporting Directive (CSRD) also requires companies to have their sustainability reports audited. This should eliminate the problems caused by unaudited reports, including greenwashing and unsubstantiated claims of actions that are hard to monitor. 

Multinationals that operate both in Europe and elsewhere may choose to publish a single sustainability report that meets European requirements. After all, consumers and regulators everywhere have access to information published on the internet. It’s likely to be difficult – if not impossible – to try to present an alternative reality in another region. It’ll be interesting to see how this works in practice but, hopefully, the European regulations will have a beneficial knock-on effect around the world.