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Changing Nature of Risk

Artificial Intelligence to Tackle the Complexity of ESG Reporting

New Artificial Intelligence tools can help companies extract maximum value from investment in ESG (Environmental, Social and Governance) amid worries about the amount of time, effort and money required to comply fully with a growing list of compliance requirements.

Boardroom debates are taking place worldwide on how to strike a balance between the cost of ESG-related activities and the benefits that accrue. Consequently, there are increasing demands for evidence that implementing ESG policies delivers business as well as societal and environmental benefits.

Moore has been gathering evidence directly from thousands of companies across a range of sectors, producing an authoritative picture of the financial impact of ESG on businesses.

Interviews with a cross-section of more than 3,000 companies, many of them medium-size enterprises, revealed that those most committed to ESG realised multiple business benefits.

Moore research found that the most committed ESG advocates:

•   achieved a collective revenue uplift of $4 trillion over the past five years

•   improved their ability to attract external investment

•   improved customer retention and brand perception

•   identified and managed key operation, reputational and regulatory risks

In many of the most successful companies ESG is now embedded across business operations and strategy, rather than being a separate initiative. Greater ESG integration was evident in our latest research, conducted in association with the Centre for Economics and Business Research (Cebr).

It shows that:

‣   75% of organisations have increased implementation of governance practices over the past five years – and a similar number intend to go further in the next five years.

‣   The IT sector is leading the way, followed closely by banking and financial, computer software and manufacturing.

‣   Three-quarters of organisations have hired specialists to take primary responsibility for governance and ESG practices. This is because there are so many variables to be monitored to ensure compliance with core ESG principles and report to a disparate group of stakeholders.

Demonstrating commitment to adoption of ESG fundamentals is increasingly important for companies of all sizes when bidding for large contracts and securing funding for future activities.

Now, the global landscape is undergoing a further transformation, with a growing realisation that technology and data are crucial in ESG management. Technology is improving collection, analysis and reporting of key information, making it easier to integrate ESG more widely into strategy.

Artificial Intelligence (AI) can process large amounts of information, identifying patterns and insights that inform investment decisions and risk management. Algorithms can predict ESG-related risks and opportunities, enabling proactive decision-making. 

AI can also streamline ESG reporting, reducing manual errors and increasing transparency, while chatbots and virtual assistants powered by AI can facilitate stakeholder engagement and feedback. 

As ESG monitoring evolves, there is an increasing focus on supply chain management. AI tools can enable businesses to monitor and help improve ESG performance of their suppliers – this is particularly helpful for smaller firms in the supply chain that may not have access to this sophisticated technology.

Many mid-market companies are exempt from first wave of ESG reporting regulations – but they cannot relax and need to prepare, says Moore’s ESG leader MARK STEWART

Technology toolkits to assess ESG risks and opportunities are improving rapidly– however the pace of change is far slower on the regulatory front, hampering efforts to establish an internationally-accepted criteria against which all companies can be fairly assessed.

This is of more than academic interest: all companies will at some stage have to prepare sustainability reports alongside their annual financial reports. Only listed or large entities are currently affected but legislation will in time affect all corporates.

Critically, when a fully sanctioned international financial reporting standard is eventually introduced globally it will become mandatory for companies to report on their suppliers’ environmental and social impact as well as having their own sustainability activities audited.

The regulatory direction of travel is currently being set by the European Union. Its Corporate Sustainability Reporting Directive (CSRD) requires companies to report on the impact of their activities on the environment and society and requires the audit of reported information – commonly referred to as ESG assurance. Companies based anywhere in the world with operations or activity in the EU will be required to adhere to the CSRD from 2025.

In tandem with these efforts, the International Sustainability Standards Board (ISSB) aims to deliver a global baseline of sustainability-related disclosure standards, focused on the needs of investors. The disclosures will provide them with information about companies’ sustainability-related risks and opportunities, to support informed decision making and build trust in the market.

Climate-related Financial Disclosure (CFD) regulations are part of the UKs efforts to make climate-related financial disclosure mandatory across the economy by 2025. If the UK makes the endorsement decision by the first quarter of 2025, the standards (IFRS S1 and S2) will apply to UK-listed companies and financial institutions, in the first instance.

Meanwhile, in the US there is a proposed rule change to the Federal Acquisition Regulation that would require certain federal contractors to disclose their greenhouse gas (GHG) emissions and climate-related financial risk. They would also have to set science-based targets to reduce their GHG emissions.

Mark Stewart, partner at Johnston Carmichael and global leader of ESG for Moore says:

“The global uptake of sustainability reporting is robust and growing, driven by regulatory requirements, investor demand and the recognition of the importance of ESG factors in long-term value creation.
“Europe is leading the way with CSRD and a growing number of clients are asking for support on understanding the complexities of the 12 standards and how they pivot from an existing ESG framework, if they have one, to full compliance with legislation.

“It can be a daunting task but by breaking the process down into bitesize and manageable phases we are helping clients manage the transition.

“Most companies in the mid-market still have time to get themselves ready as current legislation only applies to listed and large entities. However, I firmly believe that companies should be acting now to align their processes.
“As we move into an era of increased scrutiny, investors and customers will see the benefit in a more established reporting mechanism.  The process always starts with a scoping session and materiality assessment to identify gaps in data, processes, and systems which can be addressed.

“While regulation is driving sustainability reporting, putting people, planet and profit on equal footing is creating value. Business that are adopting sustainable practices are outperforming their competitors. Doing the right thing has never made more commercial sense”.