10 ESG Reporting Questions Directors Should Consider
Environmental, social and governance (ESG) reporting has come into its own as a discipline, with most public companies now issuing sustainability reports. What’s the board’s role in ensuring these reports are responsive to investors’ needs?
Inspired by the global rise of reporting beyond financial results, below are 10 questions for boards to ask themselves and their management teams. This discussion applies to companies issuing sustainability reports.
Directors should understand how the company’s ESG initiatives compare to those of competitors. ESG should be integrated into the overall corporate strategy rather than be a mere afterthought, making it equivalent to a compliance activity.
Directors should inquire whether the company’s ESG storyline is resonating in the market and impacting the company’s valuation. They should understand how the company’s message compares to that of peers, leaders in the industry and key competitors. The company should articulate how ESG initiatives make a difference in executing the strategy and identify areas where it sees the greatest opportunity to create value.
ESG investments and initiatives enable key strategies, create new revenue sources and achieve operating efficiencies, all of which affects both present and future financial returns. Thus, it may be more meaningful to investors to integrate ESG reporting into financial reports, quarterly earnings calls and investor roadshows consistent with the convergence of investor interest in financial and ESG performance. Such alignment may result in time and cost savings.
With the proliferation of standards in the market and various frameworks in play,* reporting against multiple authoritative frameworks may be necessary to address the investor needs for common industry metrics to compare and contrast performance. Until a universal framework is adopted, this reporting practice may become expected. The use of an established framework, such as the SASB’s, is an effective way to avoid “greenwashing,” or overstating ESG efforts.
*For example, the following frameworks show varying usage based on a survey of the S&P 500 by the G&A Institute (usage noted parenthetically): the CDP (formerly the Carbon Disclosure Project) (65%), Global Reporting Initiative (GRI) (51%), the United Nations Sustainable Development Goals (UN SDGs) pursuant to the 2030 Agenda for Sustainable Development (36%), SASB (14%) and TCFD recommendations (TCFD report) (5%). Other standards are available or in development.
ESG performance should be integrated with financial and operational performance monitoring; otherwise, it may become an appendage and receive less C-suite attention. Performance expectations and metrics should be linked to incentive compensation plans to drive progress and establish accountability for results. Executive sponsorship of ESG initiatives is an imperative.
The board should inquire as to management’s process for engaging and understanding the expectations of ESG stakeholders. Institutional investors and asset managers with a stake in the company may convey their expectations for the criteria management should use in reporting ESG performance in a given industry. It is also useful to monitor the company’s ESG ratings and understand what makes them change.
ESG objectives and activities present new and unique risks and opportunities that should be considered through the company’s enterprise risk management lens. Note that there is guidance on how to do this.* ESG-related risks should be incorporated into public risk disclosures (e.g., the disclosure of risk factors).
*“Applying Enterprise Risk Management to Environmental, Social and Governance-Related Risks,” Executive Summary, Committee of Sponsoring Organizations of the Treadway Commission and World Business Council for Sustainable Development, October 23, 2018.
Directors should gauge management’s confidence that the company’s disclosure controls and procedures are effective as they relate to ESG metrics and reporting. This may be an opportunity for the internal audit function to include important aspects of the company’s ESG reporting in the audit plan to provide assurance to management and the board as to the fair presentation of the underlying data.
Note that 29% of S&P 500 companies use external assurance.* Increased investor reliance on ESG reporting may elevate the importance of independent attestation over time, particularly for companies active in the capital markets. For example, in a securities offering, underwriters may request comfort letter attestation for selected ESG disclosures.
*“90% of S&P 500 Index® Companies Publish Sustainability/Responsibility Reports in 2019,” G&A Institute, July 16, 2020.
With the pandemic’s effects on customer behavior, workplace design, global supply chains and the communities in which they operate, the focus on ESG matters has shifted for many companies. For example, the approach to social issues around health and safety, the distributed workplace, and overall employee wellness has changed. Companies are also revisiting and highlighting how they address their carbon footprint as the market transitions into reopening from the pandemic. The question is, how are these and other pandemic-induced impacts altering company discussions of ESG strategies and initiatives, including the balancing of short-term needs and decisions with long-term resilience?