Corporate sustainability has been an important societal imperative for years, but the pandemic, and growing calls for racial justice and equity, have substantially raised the stakes for businesses large and small. Today, a company’s stance on Environmental, Social and Governance (ESG) issues is far more likely to impact business performance. In this new era, companies are well advised to assess and strengthen their reporting strategies.
Covid-19 was both an inflection point and a powerful lens that focused attention on the corporation and its relationship to society. Global regulators are proposing and adopting ESG disclosure requirements that address the health of the world and the impact of the company on people, planet and profits. Companies are suddenly being asked more penetrating questions:
- What steps are you taking to protect and care for your employees, customers and communities?
- What are you doing to become more sustainable, manage climate risk and opportunities?
- How does your corporate diversity, equity and inclusion align with your corporate strategy and goals?
- Does your board and governance team have the proper oversight of ESG risk?
The stakeholders asking the questions have multiplied, too. The Covid global pandemic helped bring racial disparity to the forefront, and the resulting global, green-focused stimulus and recovery is driving investment in companies that can showcase their alignment in managing issues like climate-risk, water scarcity, biodiversity and human capital, to name a few.
In addition to professional asset managers that use corporate ESG data in screening for investments, there are entire financial services companies dedicated to ethical investing. Meanwhile, specialized analyst firms evaluate investment companies’ ESG policies. For example, Bloomberg reports, “ESG assets may hit $53 trillion by 2025, a third of global assets under management.”
Rounding out the list, employees, customers, suppliers and policy leaders are all more deeply engaged with ESG issues than they were even a few years ago. And their expectations are growing rapidly.
Your stakeholders expect you to set goals for improving your ESG profile, and to communicate your progress against those goals in compelling, transparent and timely ways. You can get started by following six key steps:
- Select a standards organization. According to Ethisphere, most leading companies rely on ESG standards developed by three leading organizations—the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI) and the Taskforce on Climate-related Financial Disclosure (TCFD). Follow the one that best fits your industry. For example, energy companies, recognizing that environmental factors are key to success, may favor the Task Force on Climate-Related Financial Disclosures (TCFD) reporting style, while service-oriented companies may prefer the Sustainability Accounting Standards Board reporting, which focuses more on financially material questions and guidelines. It is also possible to create a hybrid reporting structure that more closely aligns with your company’s needs and KPIs.
- Identify material indicators. Five to seven relevant indicators for your industry group should be enough. Make sure you choose indicators for which you have information to disclose, such as climate, labor, human capital, social inequality, sustainability and so on. It is helpful to involve stakeholder groups in a Materiality Assessment to identify and rank these indicators against the impact on your business and their importance to your stakeholders.
- Conduct a peer review. Given the relative nature of ratings and rankings, analyzing disclosures (proxy, 10-K/AR, website) of peer companies can help you identify industry-specific topics and establish what is required to match or exceed the disclosures of your peers. You may find your company already has some ESG policy or procedure, much like your peers, but it’s not in the public domain so your firm is not getting credit in the ratings.
- Develop thematic messaging. Organize your material indicators and activities around three to five themes (e.g., “our people,” “our purpose,” “our planet”) or your company’s purpose. This will go a long way toward building a compelling narrative that resonates with your stakeholders. Identify internal subject matter experts and data owners within your company to understand how this data is collected, ensure that proper controls are considered and establish automated data capture, where practicable.
- Get buy-in. Greater company alignment on ESG goals translates to more effective ESG activities, so make sure management and all departments understand that they have an interest in seeing the effort succeed. For example, sales and marketing departments trying to market to eco-savvy customers need to know about the size of the company’s carbon footprint. Boards and C-Suite executives can link ESG data to long-term value creation, measured against corporate strategy and business goals. Finally, once ESG data is in a control environment, reported regularly and measured, alignment with management compensation metrics will further help drive corporate ESG goals.
- Begin to create content. Start with the proxy, annual report, website and CSR report. You don’t get credit for what you don’t disclose, so disclosing existing policies can be the lowest hanging fruit and a good starting point. Consider making available data privacy, workplace health and safety, equal opportunity and anti-harassment/discrimination policies and documents, as well as employee codes of conduct and supplier codes of conduct.
Remember you can vary topics from document to document. Your proxy statement might emphasize board oversight of ESG programs as well as board diversity, while your CSR report should be a more comprehensive report of your performance across a broad range of subjects. However, when deciding what ESG data to disclose to the SEC in your 10-K, proxy or other regulated reports and what is communicated to all stakeholders, keep in mind that the SEC is looking at all corporate ESG disclosure and communications.
Recently the SEC provided an illustrative letter containing sample comments that the SEC may issue to companies regarding the climate-related disclosure or absence of such disclosure. A typical excerpt:
“We note that you provided more expansive disclosure in your corporate social responsibility report (CSR report) than you provided in your SEC filings. Please advise us what consideration you gave to providing the same type of climate-related disclosure in your SEC filings as you provided in your CSR report.”
So, be careful—but don’t wait for the government to act. Building a thorough and compelling reporting capability now will improve your company’s standing with all constituencies, internal and external.