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The Case for ESG Reporting: Beyond Compliance

• Increasingly, ESG is a place to quantify important principles, initiatives, and actions (Diversity, vision, inclusion, efficiency, climate, governance) that will differentiate companies to many stakeholders (communities, employees, investors, customers)

• This is valuable to attract and retain the best talent, the best access to capital, and increasingly, the most advantageous investor, customer, and brand landscapes

• The impact of ESG actions is quantifiable and value-creating.

We encounter many clients in the early stages of the ESG journey still grappling with the “why” of various aspects of ESG reporting, with many specifically struggling with the “beyond compliance” aspects of ESG. Usually the key individuals responsible for ESG, especially in a mid-corporate-sized company, are the already-overtaxed finance and accounting teams, with some involvement from already-overtaxed HR professionals, so a focus on compliance is understandable. Yet, some present the argument “we need to be compliant” as the major “why” without evaluating the documented, data-driven, value creating elements of the ESG journey.

Many companies, especially non-manufacturing private companies, are new to the broader factors underlying the accelerating push from key stakeholders not just for compliance with minimal standards, but for the integration of ESG principles into the business fabric of a company. Public companies that have accomplished the level of ESG compliance required in a public filing usually find those steps to be foundational to the broader vision and journey, and use them as a springboard for a bigger, bolder, and more comprehensive effort. We have gathered a few key highlights from recent conversations with investors and financial institutions regarding their perspectives on the value of ESG reporting specifically through those lenses.

Both financial institutions and other investors view ESG as a risk consideration.

• How well a company is mitigating the transition to a low-carbon economy and has identified the attendant risks to its business model, how impacted the company’s business model may be by climate risk (including potential risks to the supply chain and other key downstream elements), how diverse and representative a company’s key executives are, are all key risk considerations for investors. The CEO of UBS recently set forth a vision wherein a single score would enable the bank to compare these risks across clients much as a rating or stock price would encompass enterprise-wide risks.

• Investors (of all types, including financial institutions, funds, investment-grade and non-investment grade) and ratings agencies are already using reporting to compare investment opportunities, to establish ratings, and hence have a direct impact on a company’s access to capital. By evaluating the risk of each element, a company demonstrates its commitment to addressing issues raised by ESG frameworks over the long run and avoiding short-run-ism.

• Using a recognized, established framework is necessary for credibility in reporting. While assurance is not yet required, there exists an emerging host of assurance providers, and investors seem to like the idea that certain portions of the ESG reports have been checked for accuracy by a third party known to them. One of the concerns many companies have in initiating an ESG reporting process is that there is no “one” framework required. That offers opportunities as well as presenting challenges. The most common approach that we see is a melding of the SASB (Sustainability Accounting Standards Board) and TCFD (Task Force on Climate-Related Disclosures) frameworks. SASB provides recommended reporting areas based on industry and the relevance of certain metrics to that industry. This is helpful in knowing WHAT investors would reasonably expect a company to report, and even if the progress towards those metrics is small at first, SASB references carry the weight of credibility. TCFD frameworks and guidelines are likewise well-recognized internationally and provide a focus on climate risk assessment. The TCFD framework emphasizes the benefits of scenario testing, which greatly appeals to risk-averse parties and provides important information around climate risk scenarios to management and external non-investor constituencies.

While there is no “one” correct method, and companies are encouraged to determine the relevance of certain standards, it is becoming crystal clear that reporting is not a “nice to have” but a “need to have”, even for many privately-owned companies. And increasingly the benefits of reporting are perceived to be value-creators beyond risk mitigation which creates its own value.

In future articles, we will dive more deeply into the perspectives of talent acquisition and management, brand benefits, community engagement, and others. From a risk standpoint, reporting and taking action to de-risk is a critical feature of ESG reporting, one that all companies should be embracing in challenging times.