Originally published on LinkedIn. James Chalmers is PwC’s Global Assurance Leader. PwC is a Fair360, formerly DiversityInc Hall of Fame company.
When it comes to transparency, there is a big difference between a compliance mentality and a trust mentality. A compliance mentality is satisfied when you tick the boxes you need to tick. A trust mentality focuses on an outcome: earning the trust of stakeholders and sees compliance as a necessary condition for success, but not sufficient.
This distinction is crucial for business leaders as they navigate a world that is increasingly scrutinizing their environmental, societal and governance (ESG) credentials. Investors, employees, customers, civil society, regulators and governments are all seeking more information about the impact companies have on the world around them and want to know what the business is doing to ensure it is sustainable.
A compliance-mentality approach to these demands is minimalist in the way it approaches reporting and assurance. It sees ESG disclosures as primarily a matter of process and would disclose everything that is mandated and no more.
This approach – which can appear sensibly cautious – poses a significant risk to earning and maintaining trust from investors and stakeholders. In a fast-changing environment, where expectations of ESG transparency and performance are constantly rising, certain disclosure requirements do not fully capture the drivers of enterprise value, let alone wider societal impact. Reporting only what is mandatory risks leading investors and stakeholders to feel shortchanged.
Efforts are underway to close the gap between what is required today and what is needed to ensure stakeholders can be well informed. Broadly trusted approaches – like the approach to climate reporting recommended by the Task Force on Climate-related Financial Disclosures are increasingly emerging. But, as is clear from the case of financial reporting, the gap will never close completely. There will always be information that companies do not have to provide that stakeholders would value. To manage that gap, companies need to choose the trust-mindset approach over mere compliance.
What does that mean in practice?
For a start, it does not mean treating reporting as a matter of public relations. Companies risk the trust of their stakeholders if they see non-financial reporting as primarily about finding the easiest standards to meet and cherry-picking metrics to tell a positive story and access markets. Over time, regulators, shareholders, customers and employees are all likely to take a dim view of this kind of approach.
Instead, what is needed is trust-mentality. For me, three things stand out when it comes to defining a corporate reporting strategy that will build trust.
The first is relevance. People need to know that you are telling them what they need to know, not just what you want to share. The information must relate to stakeholder priorities as well as corporate strategy, it must be balanced and it must comprehensively address material items. Omitting key information fundamentally undermines credibility.
The second priority is reliability. The data has to be right. That is an acknowledged challenge when it comes to financial reporting, and has given rise to a system of data capture, controls and audit to ensure reliability. The same approach is needed for non-financial information, even if the skills to compile, quality control and audit the data are different.
Finally, what is needed is consistency. Companies need to build trust over time, which means consistently reporting against the same yardsticks year after year – in years where the numbers say good things and in years when they suggest weaker performance. It also means using standards that allow comparison with other companies, at least within a given sector, and ideally beyond.
Relevance, reliability and consistency are the foundation for robust reporting – building stakeholder trust requires a deep commitment to each one.
