It isn’t easy to find someone who disagrees with the underlying premise of sustainability. As stewards, we recognize the merits of leaving the world a better place for future generations.
Institutional investors and asset managers have expressed strong support for reporting on environmental, social and governance (ESG) matters. The Business Roundtable’s release of its “Purpose of a Corporation” statement nearly a year ago expressed the importance of a company delivering value to all of its stakeholders, including its customers, its employees and the communities in which it operates. These views suggest that a sole focus on delivering superior financial results is no longer good enough and emphasis on myopic short-termism behavior misses the mark.
Given the increasing relevance of ESG reporting, CFOs should and likely will become more involved, especially as ESG metrics become material for SEC reporting purposes and integrated reporting becomes a reality. As my firm has worked with clients, attended ESG conferences and webinars, and reviewed the reporting of public companies, we have identified opportunities for improving ESG reports. Covering reports issued during the first half of 2020, these observations are by no means exhaustive, but they highlight some of the more salient and significant items companies should consider as they continue to refine their ESG reporting.
The good news is that there are many truly outstanding ESG reports out there. Therefore, my summary below is not intended to suggest that ESG reporting, in general, is not already well developed as a discipline, well done as a product and appreciated by users of public reports, as illustrated by many examples across multiple industries. The elephant in the room is the lack of comparability and consistency, which is largely due to the lack of a uniform global framework, as well as the voluntary nature of these disclosures.
So in the spirit of continuous improvement, we offer the following suggestions that CFOs may want to consider in view of their involvement, input and oversight.
- Provide a graphic “materiality map” to visualize what’s important. For example, a 2×2 matrix could be useful in highlighting key issues and ESG matters of importance to company performance and strategy, based on materiality considerations, alongside stakeholder interests and priorities. A picture is worth a thousand words, as it provides clearer context regarding ESG matters that drive the most value. While not everyone may deem this practice necessary, there are many examples in the market illustrating its use.
- Use the United Nations (UN) Sustainable Development Goals (SDGs) to identify sustainability issues and demonstrate the company’s contribution to a high-profile global initiative. The 2030 Agenda for Sustainable Development, adopted unanimously by the UN in 2015, embraced 17 universal, comprehensive goals for use by UN member states in framing their agendas and priorities through 2030. Companies should consider these 17 goals when selecting sustainability priorities relevant to their operations and, in their reports, map the areas they select to the UN framework. Best practice is to include in ESG reports the targets the company is committed to meet up through 2030, demonstrating a commitment to continually improve over time. This commitment to the future and the related track record are just as important as the company’s accomplishments to date.
- Report against at least one recognized ESG framework, if not multiple frameworks. The more popular frameworks include the CDP (formerly the Carbon Disclosure Project), Dow Jones Sustainability Indices (DJSI), Global Reporting Initiative (GRI), Global Real Estate Sustainability Benchmark (GRESB) and Sustainability Accounting Standards Board (SASB). Investors need common metrics as a means to compare and contrast performance. As there currently is no generally accepted universal framework for fostering comparability across organizations, nor any specific frameworks required by reporting regulations in most countries, companies should deploy at least one framework and perhaps consider using multiple frameworks, depending on what stakeholders desire and competitors use.
- Address the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. The TCFD report established recommendations for disclosing comparable and consistent information about climate change risks and opportunities. As companies consider these recommendations in adapting their corporate strategy, investment decisions and reporting consistent with the transition to a lower carbon economy, they demonstrate responsibility and foresight in their consideration of climate issues. Blackrock has referenced these recommendations in its commentary.
- Disclose forward-looking information and future single- and multi-year targets and goals in addition to historical ESG activity information. Focusing solely on past performance and accomplishments presents a limited perspective. A balanced view that considers future goals and commitments aligned with the strategy presents a fuller picture for investors. Again, tying goals to the UN SDGs and reporting against targets through 2030 adds credibility from a global perspective.
- Align ESG reporting with the company’s financial reporting calendar. Too often, we see the timing of ESG reports out of synch with the timing of financial reports issued for the same reporting period. As investor interests continue to focus on both financial and ESG performance, aligning the two may become more important to facilitate a complete and timely evaluation of the company’s prospects by investors. Given the efforts many companies put into their sustainability reports, we realize that combining ESG and financial reporting efforts into a single consolidated timetable requires the alignment of systems and processes, and that is not easy. However, we are aware of public companies that have saved time and money by doing so, and it is worth a look to at least close the timing gap as much as possible.
- Address the direct impact of ESG activities on improving financial performance. ESG initiatives have financial implications and, as readers of sustainability reports know, ESG undertakings are but one side of the full picture. The underlying ESG-related activities drive investments, generate returns, create new sources of revenue, reduce operating costs and enable strategies. Accordingly, these reports should highlight the impact of ESG activities on financial performance. For example, airlines focus on increasing fuel efficiency through new engine technologies, flying more direct routes, adjusting takeoff and landing trajectories, optimizing cruise altitude and reducing weight; these strategies reduce emissions as well as save millions of dollars in operating costs. Relevant financial information reflecting the results of ESG strategies helps the company tell the complete story and may be presented in summary form in the ESG report to round out the picture, shifting the reporting toward a more integrated format, which is likely where public reporting is headed eventually.
- Describe the role of the board in overseeing the company’s ESG activities. In some reports, we see little or no discussion of the board’s oversight role with respect to ESG matters. That said, we see more boards directing attention to ESG strategies and reports. As investors increase their emphasis on looking beyond financial performance, they are likely going to want to understand the extent of the board’s oversight in the ESG space.
- Discuss how ESG integrates into the company’s enterprisewide risk management (ERM) activities. ESG activities present new risks and opportunities that should be considered in the company’s ERM process, along with its other, more traditional risks and opportunities. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) provides guidance on how this is done.
- Ensure the accuracy of ESG information and share how it is validated. Steps should be taken to validate the information reported along with some type of assurance – internal, external or both. This is an area in which it is possible to broaden the scope of internal audit in meaningful ways to ensure the rigor of disclosure controls and procedures around ESG reporting and increase management’s confidence in the fair presentation of the underlying data. Attestation by external auditors or other qualified parties (for example, greenhouse gas emission attestation) is also an option for providing additional assurance to stakeholders. Increased investor reliance on ESG reporting will elevate the importance of this point over time. CFOs of public companies which are active in the capital markets should also be prepared to support these disclosures with the external auditors, should underwriters require or request comfort letter attestation during securities offerings.
- Provide data tables for easier use by investors and ESG raters. Stakeholder engagement is improved when metrics linked to an authoritative framework (such as SASB or GRI) are presented in tabular form that users can easily download into their respective financial models and tools. There is growing demand for data points and measures presented in usable, downloadable formats for analysis. Filling that demand closes the loop.
- Tell the company’s unique story. Our last piece of advice: My dad was an advertising executive. His mantra was, “The selling is in the telling.” Each company has its own unique story, so focus on telling it. ESG reporting is not a once-a-year activity. It portrays the company’s continuous journey to becoming and sustaining a business committed to delivering value to customers, employees, suppliers, communities and shareholders. Does the market “get” the story the company intends to tell?
The objective of ESG reporting is to present all environmental, social and governance topics of interest to a wide range of stakeholders in a format they can use for decision-making. The above suggestions should help the CFO and management team accomplish that objective.