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ESG Reporting is Critical – Here’s How to Get Started

Sponsored by DFIN

ESG risk equates to financial risk, and institutional investors are increasingly focused on the implementation and reporting of ESG initiatives.

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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, 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 disasters. In those 10 years, environmental risks — and a company’s impact on the environment — have skyrocketed into importance for companies and their investors.

In recent years, companies have begun disclosing not only their ESG efforts but also their underlying strategies – 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 take a more nuanced approach to telling your story, 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 have been historically overlooked. ESG rating and ranking 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 stakeholders already hold information that would be useful in ESG reporting. Knowing what information is already available and the department owning it eases the rapid collation and analysis of this information. 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 best suit its needs. 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, there is greater transparency about risk exposure, which benefits each department. (e.g., sales and marketing need to know about the size of the company’s carbon footprint if they’re trying to market to eco-savvy customers) Greater company alignment on its ESG goals translates to more effective ESG communication with investors. 

One of the most valuable things companies can do is ensuring 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.

During the 2019 proxy season companies continued to intensify and accelerate efforts to discuss ESG matters in their proxies, and in a range of ways and locations. More companies are planning to define and measure ESG programs in their 2020 proxy and are looking for guidance. 

In DFIN Solutions exclusive early release to our annual Guide to effective Proxies: Environmental, Social and Governance & Human Capital Management Edition you get a preview of how companies are disclosing ESG and HCM to meet the needs of investors and various stakeholders. 

Click here to access the DFIN ESG & HCM Proxy Guide