ROWAN CLARKE, Investor Relations

A company’s Environmental, Social and Governance (ESG) performance continues to grow in importance for investors. The challenge for companies is to develop ESG reporting metrics that reflect the specific ESG issues impacting their business, while also allowing for their performance to be measured against peers. An additional layer of complexity within this challenge is to decide on what frameworks a company should base their ESG reporting on, or alternatively, which metrics from the many frameworks to blend to create an ESG reporting suite that is the right fit.

FIRST Advisers has been building ESG expertise within the firm over recent years and made sure to attend the key ESG sessions at the recent US-based National Investor Relations Institute’s (NIRI) Conference in Boston. Standard & Poors, a leading global ESG rating agency, presented their recommendations on how a company can best progress their ESG reporting journey at NIRI. We have reviewed those recommendations and identified the following takeaways.

Recommendation 1:

ESG is a disruptive megatrend that ALL companies need to take seriously

The importance of understanding a company’s ESG performance is becoming integral to the investment decision of institutional and retail investors for many reasons such as:

1. A generational shift where millennials, women, and high net-worth individuals are favouring ESG-related investments.
2. A growing body of research that continues to show that companies with a robust ESG profile outperform peers (financial return), display lower cost of capital (financing), and volatility (risk).
3. Unprecedented sustainability challenges such as extreme weather, flood risk and sea-level rises, demographic shifts, regulatory pressures as well as data and privacy concerns create new global complexity that companies can no longer ignore.

The US financial markets regulator, the Securities and Exchange Commission (SEC), is currently proposing rules that would mandate comprehensive climate change disclosure and integrate aspects of sustainability within annual reports for US companies. While the SEC may not have been at the vanguard of mandating ESG reporting, their proposed rules will ensure it is mainstream.

When mandatory disclosure arrives, ALL companies will be required to engage on ESG issues, regardless of their ESG footprint. For companies who have not yet started to engage on ESG issues, the advice was clear – start the process sooner rather than later! 

Recommendation 2:

Understanding your ESG ecosystem is key to getting started on the journey

Knowing where to start can be a daunting process for companies. As a first step, you will want to have a good understanding of your existing ESG ecosystem. Standard and Poors highlighted two initial tasks that can help you do this:

1. Ask yourself, what are the main industry associations, government regulators and non-government organisations (who may address social issues) that impact your Company and industry.
2. Reviewing what data and information is being collected by the Company, already. At this moment, it is useful to benchmark data and information against the disclosure practices of your investable peers. Differences should be noted, and new data collected where gaps are found.

FIRST Advisers has outlined other key considerations for initiating ESG reporting in our ‘Starting the ESG Journey’ blog, following the 2021 NIRI conference.

Recommendation 3:

Embed ESG in your strategy and your engagement with the market

Companies that maintain a successful ESG program and are proactive on ESG issues are being increasingly rewarded in the capital markets. Standard and Poors advice to companies who have already established ESG reporting programs includes:

1. Integrate material ESG issues with the wider strategy and company vision. To show a genuine commitment to improve your ESG performance, you may consider linking ESG performance to your executive remuneration. Investors should see that a Company’s efforts to drive an improvement in ESG performance, is taken as a serious managerial goal.
2. Engage and target capital markets. Investors are increasingly integrating ESG information into their investment decisions, with some investors now employing investment screens using ESG data. Standard and Poors encourages companies to be forward-looking on ESG issues. Companies should develop their own narrative that points to their unique ESG profile, materiality, and strategy, when communicating with capital markets. When targeting investors or communicating with existing investors, Companies are encouraged to use this narrative to reduce their own investment risk.
3. Incorporate ESG in all communications. When ESG is fully integrated in your communications with investors, it will be embedded in all that you communicate to them. This will effectively negate the need for a separate ESG section within corporate presentations. As companies move to fully integrated ESG reporting, it will be more important than ever to ensure that ESG progress is meticulously measured.
   

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