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ESG factors gather pace in company reporting

Environmental, social and governance (ESG) factors continue to grow in prominence in annual reports, according to new research by Deloitte

Deloitte’s Annual Report Insights, which analysed 50 year-end reports across the FTSE 350, found that over three quarters (78%) set out a clear purpose beyond making profit for shareholders, up from 57% in 2019. These companies included a purpose statement which went beyond discussing only financial drivers, reported on ESG factors and described impacts that relate to wider stakeholder groups. The s172(1)* statement, where directors explained how they lead their business in a sustainable and responsible way, featured in 90% of companies’ annual reports this year. This was introduced in 2019.

Almost all companies surveyed (90%) explicitly cited climate change in their annual reports, with 22% identifying it as a stand-alone principal risk and 24% as part of a broader risk. Around two thirds of reports (64%) made reference to the Task Force for Climate-related Financial Disclosures (TCFD) – with 22% making disclosures in line with TCFD.

Culture and diversity

The past year also saw the 2018 UK Corporate Governance Code and changes to the law introducing the need for companies to provide more insight into the relationships they have with their employees. A majority of companies (74%) identified employee-linked metrics within their KPIs. Almost all boards (90%) described the mechanisms they use to monitor company culture – most commonly, for 76% of cases, in the form of an employee engagement survey.

Under the 2018 Code, companies are also required to report annually on their diversity policies. Although 50% of companies identified board-level targets for gender diversity, only a minority of those companies also identified targets for ethnic diversity, with 12% of companies disclosing broader workforce objectives relating to ethnic diversity.

Veronica Poole, Global IFRS leader and UK head of corporate reporting at Deloitte, said: “During the COVID-19 pandemic, we have seen how quickly ESG matters can affect financial returns. This reinforces the need for resilient business models and the importance of fostering relationships with all stakeholders, not just shareholders.

“It’s therefore unsurprising to see ESG factors feature high on the list at board-level and we expect this trend to only ramp up. Investors are looking for greater insight into how companies deliver sustainable value over time and other stakeholders’ voices are becoming louder in demanding accountability, clear measurement and reporting that demonstrates this. The Black Lives Matter campaign and climate change related activism are clear examples where civil society is looking for business to step up.”

Brexit uncertainties

The UK’s departure from the EU remains a driver of uncertainty for many companies. Under half (40%) referred to Brexit within their longer term viability statement, with 74% mentioning it elsewhere in their strategic report outside of the risk section.

A total of 62% of boards mention Brexit in their corporate governance statements, often as part of a list of key matters discussed by the board or in the Audit Committee reports in relation to risk. Only 28% of companies mention Brexit in their financial statements.

COVID-19 reporting

This section of the survey examined 20 FTSE 350 March year-end reports.

Unsurprisingly, all reports made reference to COVID-19, with 55% setting out a distinct section to summarise their response. Although all companies surveyed mentioned the pandemic within their principal risks, no companies in our sample identified it as a material uncertainty in relation to going concern.

Most companies (85%) made reference to COVID-19 in their s172(1) statement, often linking to information on stakeholder engagement and 85% did discuss the impact the pandemic had had on declaring dividends.

Finally, 45% of companies disclosed a financial impact of COVID-19 as ‘exceptional’ or similar in their financial statements.

Veronica Poole, continued: “The world of corporate reporting is in the spotlight as society looks to business to play its part in the drive towards achieving sustainable development goals, embedding people and purpose at the core of business, and to help build back better as companies recover from the impact of the pandemic.

“Against this backdrop, we believe five Ps – purpose, people, planet, profit and the COVID-19 pandemic – are likely to be the key areas that companies will need to communicate and report on going forward, for a wide range of stakeholders.”

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