Reporting on environmental, social and governance (ESG) factors has become a key area of focus for a variety of stakeholders in 2020, including regulators, government and the wider public. However, it’s fair to say that investors have been a key driving force in bringing ESG issues in corporate reporting to their current prominence.
One in six attendees polled at our recent ESG reporting and assurance webinar consider ‘satisfying investor demands for specific ESG performance metrics’ as their single biggest ESG reporting challenge for this year-end. What’s driving that?
Investors have placed ever greater focus on ESG integration, and responsible and sustainable investment in the last year. Additionally, impact investing is no longer merely a niche concept. Investors with trillions of pounds of assets under management (yes, trillions with a T!) are becoming more vocal in these areas, and they are approaching ESG investing with much greater discipline and focus than ever before.
Companies that take their ESG reporting seriously stand to benefit. For those that don’t, it’s not merely a matter of cost of capital anymore – there’s a real prospect of the loss of access to significant pools of capital in the medium term.
Here are six things that investors have told us they want regarding companies’ ESG disclosures. Consider these as you compile your disclosures for the coming reporting season.
Meaningful disclosures on climate change
Investors want to see that companies have deeply considered the specific impacts of climate change on their business. That means they want meaningful disclosures on climate costs and risks so they can fulfil their stewardship role.
Importantly, this means investors are becoming less tolerant of companies that continue to disclose a certain metric simply because that’s what they’ve been doing for years, or because their peers are doing so. There’s a real focus now on company-specific, decision-relevant information.
A new focus on the ‘S’ in ESG
With efforts on improving climate disclosures well underway, investors are now paying ever closer attention to how companies deal with the ‘S’ in ESG, particularly as the pandemic and the socio-political environment have thrown societal issues into sharp focus. That said, it’s important to note that there are real regulatory factors underlying this shift; for example, moves towards mandatory workforce and diversity & inclusion reporting on both sides of the Atlantic, with related metrics increasingly being included in management pay structures.
An emphasis on materiality
Investors frequently tell us that they want companies to apply a materiality filter to their ESG reporting. While it’s often mentioned that there’s an ‘alphabet soup’ of disclosure frameworks that’s becoming difficult to navigate, investors are increasingly gravitating towards frameworks that emphasise that materiality focus. TCFD and SASB are mentioned by investors most often, and – more and more – they are specifically requested by many of the largest institutions.
Management fluency in ESG matters
The days when CEOs and CFOs could sit out conversations with investors on sustainability and ESG topics weren’t that long ago, but it’s safe to say those days are over.
Investors see ESG matters as top-of-the-agenda issues with very real financial implications now – particularly climate change and the response to the pandemic, both from a financial and a societal perspective. Management is expected to be fluent in discussing these matters.
Convergence in ESG reporting frameworks
Investors see greater convergence and standardisation in ESG reporting frameworks to be the natural end point of greater integration. There’s evidence that this is in train, the recently announced merger of SASB and IIRC being an example.
Additionally, investors are making broadly positive noises about the IFRS Foundation’s proposal to set up a new, globally-recognised Sustainability Standards Board; albeit with one note of caution: they would want the new Board to advance, rather than replace, the work that existing framework owners have already done on convergence.
Transparency, consistency and assurance
These are the three key words I use most often to describe the investor perspective on corporate reporting broadly, not just in ESG reporting and analysis.
Investors always tell us that they want transparency, consistency and assurance in corporate reports. What they mean by that is:
- Transparency: They want to know how a figure was calculated;
- Consistency: They want the calculation method to stay constant over time wherever possible and, when the method has to change, they want an explanation and a reconciliation to the previous method; and
- Assurance: They want the disclosures that are material to their decision making to be assured, or at least reconciled back to a disclosure that is subject to assurance.
If you would like to find out more about the investor perspective on ESG reporting, contact us at email@example.com.