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In his annual letter to CEOs in January, CEO Laurence Fink announced that BlackRock was putting “sustainability at the center of [its] investment approach,” and made clear that companies needed to step up their games when it comes to sustainability disclosure. (See this PubCo post.) Even in the aftermath of the COVID-19 outbreak, both BlackRock and State Street have issued statements indicating their intention to continue to center their stewardship on the demand for additional disclosure on key ESG and sustainability issues such as climate change risk and human capital management.  For those seeking to improve their ESG reporting, a managing director of consultant Protiviti offers a number of recommendations (summarized below), in this Forbes article:

  • Use graphics, such as a “materiality map,” to highlight key issues, and provide data tables that allow users to download the information into their financial models and tools.
  • To identify relevant sustainability priorities, look to the 17 comprehensive sustainability development goals adopted by the UN in 2015 and reflected in the 2030 Agenda for Sustainable Development. In addition to any disclosure regarding historical performance, disclose future targets, goals and any commitments aligned with strategy. The author suggests that “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.”  (Of course, don’t forget to include  appropriate qualifications and forward-looking statement disclaimers.)
  • To help foster comparability and consistency, craft the report by reference to one or more recognized ESG frameworks, such as the CDP (formerly the Carbon Disclosure Project) (see this PubCo post), Global Reporting Initiative (GRI), or Sustainability Accounting Standards Board (SASB) (see this PubCo post). (You might also be on the lookout for a new initiative, Toward Common Metrics and Consistent Reporting of Sustainable Value Creation, sponsored by the World Economic Forum International Business Council in collaboration with the Big Four accounting firms. (See this PubCo post.)) Similarly, the author advocates addressing the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) for disclosure regarding climate change risks and opportunities. (See this PubCo post.)

SideBar

According to this study from consulting firm McKinsey, investors want to see a different kind of sustainability reporting.  Although there has been an increase in sustainability reporting,  McKinsey’s survey revealed that investors believe that “they cannot readily use companies’ sustainability disclosures to inform investment decisions and advice accurately.”  Why not? Because, unlike regular SEC-mandated financial disclosures, ESG disclosures don’t conform to a common set of standards—in fact, they may well conform to any of a dozen major reporting frameworks and many more standards, selected at the discretion of the company. That leaves investors to try to sort things out before they can make any side-by-side comparisons—if that’s even possible.  According to McKinsey, investors would really like to see some type of legal mandate around sustainability reporting.  The rub is that, ironically, it’s the SEC that isn’t on board with that idea—at least, not yet.  (See this PubCo post.)

  • Make the connection between ESG and improving financial performance by highlighting how “ESG-related activities drive investments, generate returns, create new sources of revenue, reduce operating costs and enable strategies.” Providing financial information related to the impact of ESG efforts may start to shift the report “toward a more integrated format, which is likely where public reporting is headed eventually.” Consistent with that potential approach, the author recommends that ESG reporting be timed to conform to the company’s financial reporting calendar.

SideBar

The WEF initiative advocates that, instead of discussing the various metrics in a separate sustainability report, as seems to be the more common practice, the discussion should be mainstreamed. Because sustainability is “increasingly material to business performance,” the report contends, the related disclosures should be

“addressed in the mainstream report and proxy statements and integrated into core business strategy and governance processes. By reporting on these factors on a consistent basis in its mainstream report—including a discussion of their implications for company strategy and governance—a company demonstrates to its shareholders and other stakeholders that it diligently weighs all pertinent risks and opportunities in running its business, conducting its governance processes and contributing to broader economic and social progress, including achievement of the SDGs [sustainable development goals].”

In addition, see this PubCo post, which discusses a report from nonprofit Ceres providing some guidance on how companies should best engage with their investors on the issue of sustainability. Ceres advocates that companies not “fall into the trap of positioning sustainability as the ‘right thing to do,’ without making the connection to the business case.” The business case for sustainability is best made by tying it to financial performance and demonstrating that it can drive business value. Most companies miss the boat on this point, failing “to present sustainability as an integral component of business strategy and decision-making, or as a driver of increased business resilience and revenue growth.” However, recent “trends underscore the link between ESG and financial performance, and further demonstrate that those issues once considered extra-financial are, in fact, material financial risks and opportunities impacting the bottom line.”

  • Describe the board’s role in oversight of ESG activities.

SideBar

Last year, asset manager State Street Global Advisors published an updated Climate Change Risk Oversight Framework For Directors. Climate change is identified as a continuing priority for SSGA’s asset stewardship and company engagement program. In the commentary introducing the framework, SSGA advises that boards should look at climate change “as they would any other significant risk to the business and ensure that a company’s assets and its long-term business strategy are resilient to the impacts of climate change.” The SSGA framework was designed to help directors evaluate climate-related risks within various industry sectors in three primary categories: physical risks, regulatory risks and economic risks.   A similar view was expressed by the NACD in Board Oversight of ESG, which advises that “climate-related risks must be integrated into the company’s ongoing risk assessment and quantification processes and the board’s oversight of risk management.”  (See this PubCo post.)  To demystify ESG—SSGA has developed a framework for directors, intended to provide guidance on “where to begin and what to focus on when it comes to ESG.” SSGA’s approach adapts current board oversight practices to ESG, “contextualiz[ing] ESG as a strategic and operational issue that needs to be overseen and managed…. Prioritizing ESG within an organization requires concerted effort from the top, and board members have a critical role to play as catalysts for change.”  (See this PubCo post.)

 

  • Discuss how ESG integrates into the company’s enterprise risk management activities, referring to COSO guidance on integration.
  • The author advocates that ESG information be validated, using assurance such as internal audit to assess ESG disclosure controls and/or attestation by outside auditors or other qualified parties. The author notes growing interest in assurance about ESG data as a result of increased investor reliance on the data and even for capital market transactions (in the event underwriters request comfort).
  • Finally, the author suggests that, to create a good report, the company should be sure to tell its own story of its particular journey “to becoming and sustaining a business committed to delivering value to customers, employees, suppliers, communities and shareholders.”

Posted by Cydney Posner

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