Topics:   Corporate Social Responsibility,Investor Relations,Risk Management

Topics:   Corporate Social Responsibility,Investor Relations,Risk Management

October 6, 2020

10 ESG Reporting Questions Directors Should Consider

October 6, 2020

Environmental, social, and governance (ESG) reporting is here to stay, with nine out of ten S&P 500 companies having issued reports during the 2019 reporting season. This is up from 75 percent in 2014, according to the Governance & Accountability (G&A) Institute. There is now an undeniably intensive emphasis on ESG and corporate sustainability by fiduciaries, asset owners, and asset managers, and even the US Securities and Exchange Commission is commenting on the topic.

As of February 2020, more than 1,000 companies boasting $12 trillion in total market cap had endorsed the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations for sustainability disclosure. These companies include more than 473 financial firms representing $138.8 trillion of managed capital. Meanwhile, the Sustainability Accounting Standards Board (SASB) has seen a 180 percent increase in reporting using its framework over the last two years. And, according to BlackRock, ESG data will evolve into even more of a common language among issuers and investors over the next few years.

Inspired by the global rise of reporting beyond financial results, below are 10 questions for boards to ask themselves and their management teams. The discussion applies to companies issuing sustainability reports. For non-issuers, boards should inquire of management why a report is not issued, for such companies have become outliers.

  1. Have we set compelling sustainability targets and goals that appeal to the marketplace? Directors should understand how the company’s ESG initiatives compare to those of competitors. ESG should be integrated into the overall corporate strategy rather than be a mere afterthought.
  2. What story are we telling the street? Is the company’s ESG storyline resonating in the market and impacting the company’s valuation? How does the company’s message compare to that of peers, leaders in the industry, and key competitors? The company should articulate how ESG initiatives make a difference in executing the strategy and identify areas where it sees the greatest opportunity to create value.
  3. Can we integrate our ESG reporting with financial reporting? ESG investments and initiatives enable key strategies, create new revenue sources, and achieve operating efficiencies, all of which affects both present and future financial returns. Thus, it may be more meaningful to investors to integrate ESG reporting into financial reports, quarterly earnings calls, and investor roadshows, consistent with the convergence of investor interest in financial and ESG performance. Such alignment may result in time and cost savings.
  4. What reporting framework are we using, and why? With the proliferation of various standards and frameworks—including, in addition to those listed above, recommendations from CDP Global, from the Global Reporting Initiative, and included in the United Nations Sustainable Development Goals—reporting against multiple frameworks may be necessary to address the investor need for common industry metrics to compare and contrast performance. Until a universal framework is adopted, this reporting practice may become expected. The use of an established framework, such as the SASB’s, is an effective way to avoid “greenwashing,” or overstating ESG efforts.
  5. What accountabilities have we set for ESG-related performance? ESG performance should be integrated with financial and operational performance monitoring; otherwise, it may receive less C-suite attention. Performance expectations and metrics should be linked to incentive compensation plans to drive progress and establish accountability for results. Executive sponsorship of ESG initiatives is an imperative.
  6. Is our ESG reporting satisfying the needs of the investment community and other stakeholders? The board should inquire into management’s process for engaging and understanding the expectations of ESG stakeholders. Institutional investors and asset managers with a stake in the company may convey their expectations for the criteria management should use in reporting ESG performance in a given industry. It is also useful to monitor the company’s ESG ratings and understand what makes them change.
  7. What are our ESG risks, and how well are we managing them? ESG objectives and activities present new and unique risks and opportunities that should be considered through the company’s enterprise risk management lens. Note that there is guidance on how to do this. ESG-related risks should be incorporated into public risk disclosures (e.g., the disclosure of risk factors).
  8. What have we done to ensure that our ESG-related disclosures are reliable? Directors should gauge management’s confidence that the company’s disclosure controls and procedures are effective as they relate to ESG metrics and reporting. This may be an opportunity for the internal audit function to include important aspects of the company’s ESG reporting in the audit plan to provide assurance to management and the board as to the fair presentation of the underlying data.
  9. Does—and if not, should—our independent auditor have a role in ESG reporting? Note that, according to the G&A Institute’s study of 2019 reporting, 29 percent of S&P 500 companies use external assurance. Increased investor reliance on ESG reporting may elevate the importance of independent attestation over time, particularly for companies active in the capital markets. For example, in a securities offering, underwriters may request comfort letter attestation for selected ESG disclosures.
  10. How has the COVID-19 pandemic affected our ESG reporting? With the pandemic’s effects on customer behavior, workplace design, global supply chains, and the communities in which organizations operate, the focus on ESG matters has shifted for many companies. For example, the approach to social issues around health and safety, the workplace, and overall employee wellness has changed. Companies are also revisiting and highlighting how they address their carbon footprint as the market transitions into reopening from the pandemic. The question is, how are these and other pandemic-induced impacts altering company discussions of ESG strategy and initiatives, including the balancing of short-term needs and decisions with long-term resilience?

In addition to focusing sufficient attention on ESG strategies and initiatives, the board should consider its review responsibilities for ESG reporting in the context of how it approaches Form 10-K and other public filings. ESG-related risks should be included within the scope of the board’s risk oversight process. Some companies even disclose the board’s oversight role in ESG matters in their public filings.

ESG reporting is an inevitable response to the rapid growth of sustainable, responsible, and impact investing assets across the world. Bucking this undeniable trend could mean much more than just being left behind. It can lead to high-profile proxy battles over ESG-related topics, threats to board seats, institutional investors redirecting capital elsewhere, and brand erosion. That is why quality and transparent ESG reporting should be a board priority.


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Comments

Jim DeLoachOctober 09, 2020

Henry, thank you for sharing your perspectives.

Jim

Henry BoernerOctober 08, 2020

Important and timely advice for board members. The capital markets focus on corporate ESG (strategy, performance, outcomes) is now a critical element in the intense competition for capital for issuers (access, cost of). The major credit risk agencies have developed comprehensive approaches for considering ESG as part of overall risk/opportunity of the borrower. BlackRock, State Street and other asset managers are pressing company managements to expand ESG disclosure, in part by embracing the SASB standards. Jim DeLoach has provided here a valuable checklist for every board and board member of the public company. "Sustainable Investing" is on the cusp of being all about "investing" for a majority of asset owners and their managers. One of our clients had a round robin with top holders; every one had questions about ESG. Sign of the times and strong signal for board attention to ESG.