What will investors look for in your ESG reporting? What will investors look for in your ESG reporting?

Sustainable investing has been gaining momentum for years, but the first half of 2020 has put it in the spotlight. Led by ESG frameworks (GRI, SASB, TCFD), companies (and investors) have gotten comfortable sharing ideas, aspirations and data around the ‘E’ but Covid-19 has brought the ‘S’ and ‘G’ to prominence. During this turbulent time, companies are expected to have a position on everything. In fact, nearly ¾ of Americans believe that a company needs to do more than just rally behind a single issue and needs to do the work to tackle other critical topics. In an attempt to protect their brand reputation and maintain employee satisfaction, companies are focusing their communications on consumers and employees, but investors cannot be forgotten. 

Companies should lean into ESG communications and shape their narrative to better engage investors and set the foundation for effective communication. As ESG communications evolve and more investors and companies engage it, the future is clear. It’s becoming more critical for companies to effectively demonstrate how their strategies, management and performance respond to emerging ESG issues. Companies will continue to work to put ESG information in context and expand on why a material issue is likely to drive risks or opportunities in the short, medium and long-term. Now is the time to develop best practices in ESG communications and establish credibility with investors.


What are ESG communications


Within the umbrella of Sustainability/Corporate Responsibility reporting, ESG communications focus on investor-related information. Investors want information to help them evaluate companies’ long-term value creation strategies that include opportunities and risks related to environmental, social and governance issues. Investors believe matters addressed within ESG disclosures can provide a full risk profile of a company and how prepared it is for the future. And companies with risk management practices incorporating ESG issues can better address broader industry, regulatory and societal risks and are more likely to drive long-term sustainable performance. 

In a recent survey by Morgan Stanley, 80% of asset owners believe that companies with ESG practices may be better long-term investments and nearly half (45%) now believe that generating environmental and social returns is as important as generating financial returns.


How investors use ESG disclosures


Investors are relying more on ESG data to strengthen their investment strategy. But since investment strategies vary greatly among investors, there is no unified message to companies on what ESG data to provide and how to provide it, leaving many companies unclear on why investors want this data and how to give it to them. 


Why some companies are reluctant to disclose 


Understandably, as companies want to paint themselves in the best light in front of investors, they are less likely to disclose information that indicates they might be higher risk. And some companies are even concerned about providing data that may be misunderstood or misapplied, again with the fear that they might indicate higher risk.

Furthermore, officers and senior executives in IR uncomfortable with ESG questions may consider them a risk in themselves. They worry that by providing ESG disclosures, they could undermine valuation, attract added scrutiny or even distract from their core narrative.


The ESG reporting landscape: How companies are stacking up

  • Leaders – forward-thinking companies that have integrated ESG values, goals, and metrics into broader business strategies to mitigate ESG risks and are communicating them effectively to investors. More importantly, sustainability teams are fully integrated into the company’s strategy development, risk assessment, or investor relations teams. As ESG reporting continues to evolve, Leaders have the opportunity to shape the narrative not only around their brand but ESG reporting overall. 

    Nike is leading the way by providing their ESG narrative in three formats (Impact Report, Executive Summary, SASB Index) to target their broad audience. The reports highlight their ESG performance through various tables, charts and infographics, making it easily readable and searchable.
  • Adopters – companies have adopted measures to integrate ESG questions into their risk management but are failing to communicate it clearly. These companies also provide robust sustainability reports with a significant amount of additional information their broader efforts making it difficult for investors to parse out what’s relevant for them. Many in this group are simply re-branding these sustainability reports as ESG reports or are developing ESG supplements that simply contain raw data in an attempt to close the gap but failing to provide the necessary context that ESG disclosures need. 
  • Laggards – companies that have not dedicated significant attention or resources into understanding how ESG factors may impact their business. These companies might also produce corporate responsibility reports that focus only on employee activities instead of long-term strategy.


Elevate your ESG reporting


Once a company is committed to ESG reporting and has allocated the resources needed, there are five steps companies can take to go from a ‘Laggard’ to a ‘Leader’.

 

1. Integrate an ESG focus throughout the organization, including company strategy, value-creation processes and Enterprise Risk Management.

 Organizations need to incorporate ESG risks and opportunities in their overall processes to achieve long-term value creation that investors are interested in seeing. Goals and roadmaps provide companies a clear way to share their strategy and risk mitigation plans by helping to indicate ESG integration throughout a company. Public goals can be used to communicate where companies want to be (ambition) and signal the amount of effort their willing to give (commitment) in mitigating their ESG risks. For example, a company that wants to ensure there are no disruptions to its raw material supply could announce new goals to procure more sustainably sourced materials. 

In an effort to continue driving purpose and embedding sustainability throughout the organization, Unilever announced its new corporate strategy Compass. The new strategy has three core beliefs, that brands with purpose grow, companies with purpose last, and people with purpose thrive. The core is then broken out into fifteen multi-year commitments spanning social, environmental and economic performances. 

 

2. Create a dialogue with investors 

By engaging directly with portfolio managers and analysts, companies can better understand how ESG data is used to inform investment decisions. This input provides context for companies on the sort of information that would be decision-useful for investors. An open dialogue between companies and investors creates a feedback loop that informs both sides on problematic gaps and advances overall knowledge on ESG issues. More importantly, companies can be informed of emerging trends and stay ahead of future investor requests. A company, for example, may describe their ESG performance using industry-specific language, which may be unfamiliar to investors in this context. To address this issue, the company may engage investors and learn what language resonates better for ESG topics. 

Intel has a dedicated team to engage investors openly and year-round in an effort to get feedback on a variety of issues, include ESG. And based on this outreach in 2019, Intel further embedded ESG information into their annual reports, expanded their Investor Relations page and added SASB and TCFD to their disclosure frameworks.

 

3. Identify what decision-useful information will look like  

If the objective is to present information that shows how superior ESG management justifies a higher valuation, companies then should think through what information is required to illustrate this, and how they need to structure their disclosure for each material topic to demonstrate it. 

 

Decision-useful information will need three things to be effective: context, strategy & management and metrics. 

  • Context: Tells investors how and why a company may see different risks or opportunities within its industry. For best practices, context should be substantiated with external data/evidence that demonstrates the scope and scale of the potential risks and opportunities. 
  • Strategy & Management: Provides investors with the approach or strategy the company adopts to address those risks, including descriptions of various aspects such as control processes, targets and KPIs, innovation and R&D investment, and others.
  • Metrics: Gives investors performance data so they can better compare companies. Trend and in year data demonstrating relative performance to specific aspects and will vary among material topics. 

BASF integrates these risks and opportunities into a fuller value creation plan modeled on the framework of the International Integrated Reporting Council (IIRC), which depicts value beyond financial.  

 

4. Improve data governance through collaboration

As decision-useful information relies on metrics, companies need to create the foundation to collect and prepare ESG data to communicate it more effectively. The necessary level of sophistication to properly manage, synthesize and share data will require input from various functions working together. TCFD indicates the future of ESG reporting will be grounded in financial disclosures and that ultimately depicts what investors want to understand – the impact of ESG issues on disclosures such as operational costs, market share, regulatory costs, brand value, and others. For example, identifying company-specific climate-related risks and potential financial impacts will require input from risk management, investor relations and finance as well as sustainability. More importantly, proper data governance will provide the necessary foundation to adjust to an evolving ESG landscape.

Societe Generale details their governance structure and how their business and service units are integrated to implement systematic evaluations of climate-related risks and opportunities. By having a governance framework where climate strategy is embedded into the Group’s strategy and climate-risk is integrated into the risk management framework, they can effectively monitor evolving climate risks, manage and prepare climate-related metrics, and provide sustainable finance solutions and products to clients. 

5. Communicate efforts more effectively to investors by leveraging reporting frameworks 

In addition to mandatory reporting obligations, which vary geographically, many voluntary frameworks (GRI, SASB, TCFD) have been developed and are widely used to meet the ESG-related reporting needs of investors. Companies can leverage these frameworks to engage investors on a broad level as they gain a better understanding of how to identify and communicate their ESG-related risks and opportunities. But as the frameworks vary, companies need to evaluate each framework to find which fits their needs best, and it may result in using multiple. 

And as various audiences continue to gain interest, leading companies will need to critically evaluate the length of their reports. Companies shouldn’t be afraid to link out digitally to information found on different platforms for those interested in learning more about their sustainability efforts without taking away from (or overwhelming) their overall ESG narrative. For example, companies can link to more detailed information that raters and rankers may need but would be less relevant to mainstream investors. 

GSK recognizes the need to address a broad audience interested in its ESG data. They found a solution to provide an ESG supplement to their broader Annual Report that indicates their recent progress and directly addresses indicators outlined in UNGC, GRI and SASB. 

Underpinning all of this activity, and seen in each step, is a need for better interaction between the sustainability team, the chief risk officer, investor relations and finance (as well as other functions). Integrating these workstreams will go beyond creating long-term value by defining specific ESG risks and opportunities in a more granular and market-orientated way.  


How we can help


Salterbaxter is well placed to work with clients on shaping their narrative through ESG-related communications. As we work with companies globally to develop Annual Reports and Sustainability Reports, we can easily discuss both annual performance and sustainability performance and, more importantly, where they intersect. Communicating ESG issues with an IR perspective is challenging for most but our experience in designing and developing both Annual Reports and Sustainability Reports position us to help companies shape their ESG narratives and engage investors in addition to their other audiences. 

The impacts of COVID-19 on corporate transparency will likely last and raise the bar on disclosure requirements. As companies feel regulatory, investor and consumer pressures to disclose ESG information, the ability to uniquely engage and target different audiences will be key. Those who learn and apply this now will be able to separate from their peers and establish themselves as a leader shaping the conversation. 


Questions to consider


Building on these thought starters and proof points we would love to explore the following questions in next CONNECTED video conversations:

  • How do you communicate your current sustainability initiatives? Are you reporting on your sustainability efforts annually?
  • How are you currently sharing ESG information with investors?
  • Has there been a recent shift in the focus of your sustainability efforts due to COVID-19?
  • Is sustainability already integrated into your business strategy?

 

To register your interest in our CONNECTED video conversation series, contact Michelle.Obee@salterbaxter.com

We hope you can join us!

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