While it may seem that ESG reporting is one of the latest hot topics in the marketplace, the reality is that the concept of ESG has been around since the 1970s. ESG is the discipline of applying certain non-financial criteria to the financial analysis and evaluation of funds under consideration for investment. ESG has also been called sustainable investing or socially responsible investing (SRI), and investors are now demanding it. Over 40% of investments are considering ESG factors in their decisions because they're aware that companies with risk management programs that factor in the greater industry, regulations and societal risks are more likely to achieve sustainability and long-term shareholder value. While companies are more invested in ESG reporting as part of their strategic plans and investors are asking for more information, there remains a divide on meeting expectations on both ends. The key to perfecting ESG reporting is to match investor expectations with accurate, consistent data.
How to Navigate Complex ESG DisclosuresFiguring out what kinds of data to report and how best to present the information may not be as difficult as some companies make it out to be. Organizations like the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative and Innovative Collaboration and Institutional Shareholder Services (ISS) are available to help companies identify material issues and understand them in the context of their businesses. The first step in ESG reporting is to collect data. Investors are often leery about the quality of data that companies are offering. In fact, in many cases, investors are seeking out third parties for assistance in verifying the data that companies are presenting. Companies will need to focus on getting good data and proving its validity. To gather and present the most valued ESG data, companies will need to stand in the shoes of the investors and view the data from their perspectives. Investors want assurance that companies are managing their ESG risks adequately, and that the business has the ability for growth regardless of any unforeseen crises associated with environmental, social or governance events.
What Are the ESG Factors?ESG reporting issues have been around long enough that investors expect to see disclosures that provide genuine data and that don't just account for limits or exclusions to portfolios. Investors want greater depth of information, such as how the company addresses issues, manages risks, and captures opportunities and other information that the balance sheets and income statements don't show. Under environmental concerns, investors want to know how companies are addressing their policies about climate change, toxic emissions and environmental disclosures. Investors also have their eyes on social issues, such as workforce diversity, human rights policies, and workforce and employee relations. In the area of governance, investors are in the loop on all of the current governance issues on which corporate boards and companies should be working. As of now, investors are most interested in board independence, management compensation, diversity and financial reporting policies.
What Information Do Investors Want About ESG?All investors aren't created alike. Some are looking for short-term gains and others are looking for long-term value. Either way, they're interested in standardized, robust data to support their investment decisions. The variance in their perspectives presents a confusing, inconsistent message to companies about the kinds of data they're seeking. Their requests are so confusing that companies just don't know what to give them, so the information they put forth is often just as confusing and inconsistent as the requests for it. Attention to ESG creates sustainable long-term value with the opportunity for growth and related risks. It's vital to factor in ESG to understand the full risk profile of a company and how well it's primed to navigate the future. Companies understand these facts, but where they're struggling most is with integrating them. About 80% of companies have some ESG component, but only 27% of them integrate ESG reporting into their long-term strategies. To complicate matters further, investors don't trust the accuracy of the ESG information they receive, and companies aren't sure if the work they need to do to provide quality ESG disclosures has enough value to make it worth their efforts.
What Investors Can Do to Get the Kind of Data They WantPart of the reason investors haven't been happy with ESG disclosures is because there are so much discrepancies in what they're asking for. To get usable data, investors will need to work with asset management groups to understand each other's needs for ESG and relay that information to corporations. Investors can assist companies in providing the data they want by being transparent on how they value or devalue the ESG information and disclosures. Investors and industry associations could align themselves and recommend standards for disclosures. Another thing that investors can do is to encourage CIOs to obtain specific data on ESG so they can evaluate a company's long-term prospects. Since investors want the assurance of quality data, they'll also need to be clear about how to define the data they want.
What Companies Can Do to Shape the Data and FormatCompanies have been skeptical about providing much of anything because the standards, parameters and expectations for deliverables haven't been clear. They will need to work with asset managers and analysts to better understand how they can integrate ESG with investment decisions. To meet investor expectations, companies will need to develop verifiable processes to assure investors that data is accurate and be transparent about their process in publications. In addition, they need to communicate their risk management strategy comprehensively and avoid boilerplate statements. Companies will need to take an investor perspective, perhaps by providing quantitative material on how the company's rigorous risk management should give them a higher consideration. Various corporate departments could combine to develop a simple long-term value creation plan that includes ESG risk and opportunities. Also, companies could work with SASB and investors to come to an agreement on the best investor format for ESG reporting. ESG is one of many factors that have made enterprise governance management so challenging. Software solutions, like the products in Diligent Corporation's Governance Cloud, streamline and automate many of the governance processes, freeing up many hours for boards to work on complex issues like ESG. Diligent Boards provides the perfect platform for working collaboratively on issues and shaping the future of ESG disclosures.
The Rising Tide of ESG – Navigating the Road Ahead
The Board's Role in Leading and Enabling GRC
Board and Executive Collaboration: Components of a Secure Platform for the Evolving Workplace