The following is an article I was recently asked to write for the Chartered Governance Institute. You can read the original version here.
ESG reporting is a complex space that’s no longer only relevant to the largest companies. Here are six things every company needs to know:
ESG is CR is CSR is sustainability. Environment, social and governance (‘ESG’) is a company’s approach to managing sustainability, i.e. the broader and longer-term impacts of your business. Corporate responsibility (‘CR’) or corporate social responsibility (‘CSR’) were traditionally how businesses referred to their social good (charity work etc.), but the commonplace term these days, sustainability, is broader than this, covering environmental and economic impacts as well as social ones.
ESG reporting is a legislative priority. Rather than legislating what companies should do, the government’s preferred mechanism to drive sustainability change is to mandate public disclosure. We’ve seen this already in the Non-Financial Information Statement, Gender Pay Gap Reporting, and Streamlined Energy and Carbon Reporting (SECR), and more legislation is on the way. Task Force on Climate-Related Financial Disclosures (TCFD) reporting, which requires extensive climate change disclosures, is now mandatory for many large companies, including those in scope for the Non-Financial Information Statement (and it’s a requirement for premium listed companies on the LSE). If recent proposals go ahead, this will also become a legal requirement in the US.
Investors rely on public ESG information. Investors often use third-party experts to evaluate company ESG risks. Notable ESG rating schemes include MSCI, Sustainalytics and ISS. Performing well on these attracts a wider investment pool; performing poorly can lead to exclusion from investment consideration. Quick wins to improve rating scheme performance include alignment to the UN Global Compact and publishing company policies (e.g. anti-bribery, whistleblowing, etc.).
Investor reporting of portfolio ESG impacts will likely soon become mandatory. Already required in Europe, the UK has recently finished a consultation on introducing mandatory portfolio ESG reporting – the Sustainability Disclosure Requirements (SDR). To comply, asset managers will need quantitative data from portfolio companies.
ESG best practice is the foundation for legislation. TCFD is a best practice standard that has just become a legislative one for large companies (see above). The SDR requirements will likely be shaped around the upcoming International Financial Reporting Standards (IFRS), which will be built on and consolidate existing best practice reporting standards. Whilst not a legislative requirement, it would be remiss not to mention the importance of the UN Sustainable Development Goals, references to which are now commonplace in the Annual Reports of large companies, with the most progressive aligning their strategies and KPIs to the framework. The UN now has a section of its website dedicated to supporting companies to align these goals.
Climate change is an issue relevant to all. Every company should focus their ESG disclosures on their most significant sustainability impacts. Whilst these will vary considerably, for nearly all companies, this will include carbon. If companies aren’t publicly disclosing their immediate carbon footprint (‘scope 1 and 2’), this should be a priority. Thereafter, companies should publicly recognise the risks of climate change to their business and set appropriate mitigation/net zero targets. Publishing plans to achieve these targets further improves credibility and impact.
For support with your ESG reporting, strategy development and/or implementation, contact Rawstone Consulting here.