A version of this article first appeared in the Spring 2021 issue of the IR Society’s Informed Magazine. It has been updated to reflect recent developments on the IFRS Foundation’s Sustainability Standards project.
KPMG’s investor engagement team is an IR team with a difference – not least because it doesn’t have a share price to worry about.
The team sits within KPMG’s UK audit practice and consults with institutional investors to determine their priorities regarding corporate reporting, governance and stewardship and – of course – audit and assurance. They use the insights gained from shareholders in UK companies – the ultimate clients of an audit – to help direct their auditors’ attention to the areas of the financial statements that are key to investment decision-making.
In light of this, the KPMG team tends to focus on emerging policy areas affecting entire sectors or markets, rather than company-specific issues; so environmental, social and governance (ESG) disclosures have been firmly on their radar for a number of years.
Here are five of the key corporate reporting and ESG themes from the team’s discussions that leading investor relations teams will be keen to note.
1) More transparency and consistency in corporate reporting
Lindsey Stewart, Senior Investor Engagement Manager, notes: “We’ve engaged with investors on several recent consultations – for example, on the future of corporate reporting, goodwill and impairment, income statement presentation, and sustainability standards. There’s one common theme that they relate to us each time: they want more transparency and consistency in corporate reporting. That need manifests itself in several ways.
“For example, many investors say they want better consistency and linkage between the financial statements and the reporting narrative, particularly where these include important disclosures and metrics on ESG, or risk management and business resilience. It’s hard to overstate how strongly some investors feel about this. We’ve been told by several recently how much they would like to see some of the ‘marketing spin’ and ‘fluff’ taken out of corporate reporting and for companies to make their reports more user-friendly to investment decision makers.
“Others highlight the barrier to their decision making presented by some companies’ opaque approach to using alternative performance measures. These are all areas in which leading companies can take the initiative to provide meaningful, transparent and consistent information to their most important stakeholders.”
2) Meaningful disclosures on climate and other environmental themes
Investors want to see deep consideration of the specific impacts of climate change on their business – both the risks and the opportunities. That means they want meaningful disclosures on each of these so they can fulfil their stewardship role.
There’s a challenge here for reporting companies to address, as there’s now a real focus on company-specific, decision-relevant information. Investors are much 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. Besides that, climate is no longer an issue solely for the front half of the annual report. As stated by Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change: “Companies can no longer afford to ignore what climate change means for their business. Investors need financial impacts of getting onto a net zero pathway to be booked and acted on.” Increasingly, investors are calling for financial statements to reflect climate risks and opportunities and for asset valuations to reflect assumptions consistent with a credible, science-based net zero strategy.
It’s also worth noting that investors have taken a broader view than just climate when considering environmental issues, and there are signs that they are looking for companies to disclose more in other areas – particularly nature and biodiversity preservation.
3) Companies to focus on the S in ESG
The momentum in the market on climate disclosures has resulted in investors transferring much of their attention to social themes that have been thrust into the spotlight in 2020 – particularly diversity and inclusion, and workforce disclosures.
Sophie Gauthier-Beaudoin, director of the KPMG team, mentions: “Investors in UK companies have signalled their intention to hold boards to account on diversity and inclusion, seeing this not only as a matter of fairness but one of effective leadership. Investors are recognising the growing body of evidence that shows that diversity both in the boardroom and the talent pipeline can improve the decision-making process in companies, and that diverse teams perform better overall. While investors do celebrate the progress that has been made on gender inclusion over the past five years, investors have outlined policies to vote against boards that are not comprised of at least one-third women, or boards where ethnic diversity is persistently absent.”
Additionally, taking their cue from new disclosure requirements in the United States, investors increasingly want to see disclosures that illustrate a company’s approach to human capital and workforce engagement.
4) Companies to focus on improving their data quality, processes and controls
Investors implementing ESG strategies see data quality and availability as one of their biggest challenges, with lack of consistent ESG data and unclear terminology frequently identified as obstacles by institutional investors.
Aligning the processes and controls around non-financial information to those used for financial reporting is an important ambition and one we are seeing listed companies pay greater attention to now. Investors have also emphasised the value of obtaining assurance over material disclosures outside the financial statements and it’s noteworthy that 61 percent of UK companies responding to KPMG’s 2020 Survey of Sustainability Reporting have sought such assurance.