The power of ESG is only beginning to be unlocked; ESG risk equates to financial risk, and institutional investors are increasingly focused on the implementation and reporting of ESG initiatives. DFIN’s John Truzzolino discusses where to begin.
Every company is on its own unique sustainability and social responsibility journey, from major corporations pushing for waste reduction in supply chains and generating solar energy to local banks building community care initiatives into customer acquisition and retention. More than just making companies appear socially conscious, these environmental, social and governance (ESG) efforts are strategically driven, and because they impact profitability, they are communicated to investors in various ways.
ESG Gaining Importance
In 2008, only one societal/environmental risk – pandemics – was listed among the top five risks a company faced in terms of overall impact. In 2018, four of the top five risks were ESG-related, including extreme weather, water crises and natural disaster. In those 10 years, environmental risks — and a company’s impact on the environment — have skyrocketed into importance for companies and their investors.
If your company already reports ESG issues, congratulations! You’ve caught on to a growing trend of the last 10 years. In recent years, companies have begun disclosing not only their ESG efforts, but also the underlying strategies behind them, allowing institutional investors to assess risk and make decisions. You may be just beginning your sustainability journey, but by refining and expanding your ESG reporting, you can tell your story in more nuanced ways, plan for long-term strategic goals and attract investors along the way.
While a company’s C-suite and board of directors are noting increasing interest from investors in ESG-related risks, studies have shown that public companies still lag in disclosing the information investors want most: decision-useful information to help them assess risk. This is the same information companies need to create and enhance corporate value through a coherent sustainability strategy.
While ESG is proving to be a versatile way for gauging the risks a company might face, the power of ESG is only just now beginning to be unlocked. Going forward, companies will use ESG frameworks and rating services to measure their progress against a wide range of unfolding issues.
4 Steps to Improve Your Reporting
Knowing that ESG reporting is this important, how can an organization improve reporting and communicate this to investors and interested parties? Her are four steps to get you started:
Measure and Assess
It’s best to begin with a materiality assessment. When ESG material facts are measured and managed, corporate sustainability, corporate responsibility or ESG-related disclosures can become a platform for your management team to talk about other facets of a company’s story that were historically overlooked. ESG ratings and rankings firms use different models to gather information and score your company. Analyzing investor ESG data providers’ company profiles created by MSCI, Sustainalytics, Bloomberg, Thomson Reuters and ISS E&S scores will help you understand the ESG data points used to arrive at their weighting and scorings.
Tap Internal Resources
You don’t have to start from scratch; it’s possible internal shareholders already hold information that would be useful in ESG reporting. Knowing what information is already available and which department owns it makes it easier to collate and analyze it rapidly. The exercise of mapping available information, programs, initiatives and data for new and developing ESG disclosures presents the opportunity for the issuer to frame the ESG information for different stakeholders.
Find Your Framework
It is up to each company to find the framework and the KPIs that work best. Energy companies, recognizing that environmental factors are key to success, may favor the Task Force on Climate-Related Financial Disclosures (TCFD) reporting style, while service-oriented companies may prefer the Sustainability Accounting Standards Board reporting, which focuses more on financially material questions and guidelines. It is also possible to create a hybrid reporting structure that more closely aligns with your company’s needs and KPIs. Understanding the most popular emerging global standards and reporting frameworks – including GRI, CDP, TCFD and SASB – will help deliver decision-useful data.
Set Goals and Align Teams
Align management and departments around understanding the need for ESG risk assessment and reporting. When information silos are broken down and there is greater transparency about risk exposure – sales and marketing do need to know about the size of the company’s carbon footprint if they’re trying to market to eco-savvy customers – the company will be more aligned in its overall goals, which can then be translated into communicating those goals to investors.
One of the most valuable things companies can do is to ensure their formal reporting and other disclosures are meeting investors’ and other stakeholders’ informational needs. Companies should fully articulate their long-term strategy; this should include how their ESG risk and opportunities are informed by the company’s purpose and culture and the policies and business practices that are aligned with strategic objectives and long-term value creation.