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Financial reporting and compliance as a competitive advantage

Updated: Nov 15, 2022

Businesses have a choice when it comes to the increased forward momentum of ESG considerations and reporting. They can choose to be proactive or reactive, but they cannot ignore the need and imperative indefinitely. Competitiveness includes the ability to capitalise on successes and increase external credibility, as well as the cost and effectiveness of compliance.

The external credibility of compliance as a competitive advantage is heavily dependent on the company's ability to manage stakeholder perception. To that end, businesses must take an honest look at the ESG-compliant future reality, make some firm decisions, implement appropriate actions and investments as soon as possible, and, most importantly, ensure that their investors and key stakeholders are well informed. Inadequate disclosure prevents investors and shareholders from discounting associated risks and, as a result, may give the impression of inflated assets, understated liabilities, and overstated profits.

According to the annual reports of companies with high greenhouse gas emissions, they appear to be waiting and seeing. Few publicly traded companies make adequate mention of the potential financial and balance-sheet impact of their carbon emissions targets in their annual reports. Carbon Tracker examined the 2021 fiscal year-related corporate disclosure of 134 high-emission-generating companies in a recent report and discovered that 98% of these listed entities did not provide sufficient evidence that they had considered the impact of climate issues in their current reality and forecast. They also discovered that external auditors were failing to take into account emissions reduction targets or the impact of pending regulatory changes on business sustainability.

Carbon Tracker, on the other hand, identified examples of adequate disclosure and named a large mining company as an example of adequate relevant information to align with its ambition to achieve net zero emissions by 2050. According to the financial statements, this company will most likely have to write down the entire value of its thermal coal assets at that time in order to meet the IEA's Net Zero Emissions target of 2050. This type of information boosts the company's external credibility and opens the door to discussions about future strategies and investments.

By extrapolating these findings to general management and financial practises across industries, it is reasonable to conclude that most current commercial entities have not adequately considered the impact of pending regulatory implications, or if they have, they do not have an alternative in place or may not be in business at the time. Whatever the actual reality is, the first step is to start gathering information, consolidating and reporting on the current situation, and sharing the definitive future plan, such as that of a current Oil company working on significant carbon sequestration and alternative energy capabilities as potential future revenue streams.

Access to up-to-date and contextualised regulatory and industry compliance requirements, as well as the ability to consolidate, manage, and report on relevant actions toward a future goal, are required for a compliance management approach. One-stop solution providers like Ariscu may provide the 20% difference in transforming compliance management into a competitive advantage.

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