Compliance DFIN

Crafting and Reporting Decision-Useful ESG Communications

Sponsored by DFIN

As ESG initiatives and decision-useful reporting continue to gain importance, many C-suite and boards of directors are truly starting to pay attention.

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Every issuer is on its own ESG journey, regardless of whether the firm is disclosing ESG and sustainability reports today. As ESG initiatives and decision-useful reporting continue to gain importance, many C-suite and boards of directors are truly starting to pay attention. The power of ESG is only beginning to be unlocked as companies realize ESG risk equates to financial risk.   Ownership of ESG and sustainability should reside at the top of any company with full support for the CEO and the board.  

In recent years, C-suite executives and their boards of directors have heard growing concerns from various stakeholders regarding the quality and usefulness of company disclosures related to environmental, social and governance (ESG) issues.  These stakeholders include, employees, customers, investors and governments, all of whom have a different understanding of what ESG means. However, there are many resources companies can use to understand the current ESG landscape, identify a plan to start the ESG journey and structure a report that satisfies all stakeholders.  

As an introduction, prominent ESG issues include, but are not limited to: climate change and environmental opportunities; human capital management; and corporate governance factors, such as board strategy and executive compensation. One driver behind the growing need for decision-useful corporate ESG data is the integration of ESG factors into investment analysis by mainstream investors. Another driver is the growing interest of employees to work for corporations that reflect similar values on climate change, environmental issues, social unrest and human capital management. According to the Wall Street Journal, employee groups are taking their message to corporations within shareholder proposals and using social media to gather support. 

In a recent survey, of 24 institutional investors with $1.7 trillion in assets under management, DFIN asked: Where do investors get ESG information? Of those responding, 75% said they prefer to get ESG information from third parties – MSCI ESG Research, ISS and Sustainalytics were the most frequently cited sources of third-party data. However, only 55% of the same investors found the ESG information provided by third parties was sufficient to make an informed material assessment of the factors in a company’s business. Worse yet, just 30% found the information provided by the company in CSR, or sustainability reports decision-useful.

Adding to the ESG landscape is the growing proliferation of ESG ratings and ranking firms, numbering at over 200 worldwide. A recent publication by SustainAbility, “Rate the Raters 2019,” outlines that the ratings process can vary widely. MSCI, Sustainalyitics and ISS E&S Scores pull data from publicly available company disclosures, then apply their methodology, honed with in-house analysts, to deliver a company rating. Others like Bloomberg and Thompson Reuters provide raw ESG data collected from public disclosures, and other reporting that analysts can interrupt and utilize in their own customized ESG weighting. Finally, firms like RobecoSAM and CDP send annual detailed assessments questionnaires which they request companies fill out and return.

Regardless of the approach, company ESG data is not always accurate or interpreted properly, which can skew ratings. Many rating agencies comb through massive amounts of corporate data manually. Using artificial intelligence, which can be trained to find industry-specific ESG issues, improves the process and quality, but the analysis can still be subject to error. Issuers must be aware they are being judged on data from ratings agencies that may not necessarily reflect how their companies operate, manage and account for ESG risk and opportunities.  

That being said, there are several clear steps corporations can make to take ESG issues into their own hands: 

  1. With CEO and board support, develop a cross-disciplined sustainability committee, focused on company specific material ESG issues, 
  2. Address the quality and usefulness of any current ESG data, 
  3. Review the ratings and ranking methodology to drive up scores; 
  4. Communicate a new narrative, by laying out company-specific ESG and sustainability qualitative goals and strategy.

As mentioned before, ESG has a different definition to each stakeholder, so the starting point for many issuers is to bring together a team or cross-disciplined subject matter experts from across the company, and in certain cases the supply chain, to level-set a company-specific ESG definition. Legal, human resources, investor relations, working in partnership with Enterprise Risk Management financial reporting, operations, procurement, products/services, marketing and sales, should go through a gap analysis of industry-specific ESG issues and determine which issues are meaningful and material to their company’s value and long term strategy.

After a company is ready for the reporting stage, it must keep in mind that enterprise risk management and value are two sides of the same coin – one reason why any attempt to mainstream ESG reporting requires applying a rigorous process, much like the accounting of a company’s financial reporting.  Board oversight is key to establishing policy, procedures and process to keep the board informed on emerging ESG risk and alignment with long-term business strategy. 

 A logical starting place for companies planning for their first CSR report, is to use one or more of the global ESG reporting frameworks including:

Though there are several ESG disclosure frameworks in the marketplace, one framework should not necessarily perfectly fit a company’s needs. may prove confusing. When it comes to ESG disclosures, some companies are able to simply select the framework that suits their business best, while others can pick and choose aspects of multiple frameworks and customize the disclosures they provide based on stakeholder needs.

Visit DFIN online and download a recent white paper, ESG Risks and Opportunities: Understanding the ESG Landscape, for more information and four critical steps to measure, manage and communicate an ESG risk and long-term business strategy.

Join DFIN and industry peers for a recap of the 2019 Proxy Season to discuss growing interest in ESG and Human Capital Management by investors.