There is growing evidence that companies that effectively manage material ESG risks and opportunities are more resilient during times of volatility and uncertainty, and financially outperform their peers over the long run.6 These benefits, together with increased regulatory focus on ESG issues (such as climate change), and the increase in investors incorporating relevant ESG issues into their investment decisions, means that management of and reporting on ESG issues that are tied to the company’s ability to create value is likely to rise in importance.7

Before a company can begin to think about reporting on its ESG performance, it needs to determine which ESG issues are relevant to it and how these issues fit into its overall business strategy. Some companies conduct a formal assessment of these issues, either by external discussions with shareholders and other stakeholders, or internally by looking at ESG issues already on the board’s agenda or included in the company’s business plan or risk management program. Companies should be able to answer the question: how do the specific ESG issues that the company has chosen to focus on contribute to its short-term financial performance and/or long-term value creation?

Companies new to ESG reporting may wish to begin by examining what issues their peers are focused on - reviewing reporting and disclosures from both peers as well as companies upstream and downstream in the supply chain. Some companies may find they are already focusing on and managing relevant ESG issues because of existing regulatory requirements or an understanding of how these issues impact their performance, e.g. cybersecurity. For many organizations, there may be just a few topics that are of high importance.

Current state of ESG messaging

Reporting is how your company communicates to your various stakeholders what it is doing. Whether your company is engaged in an active ESG program or not, reviewing your existing disclosures in the context of how peers communicate, including messaging in SEC filings and your proxy statement, is a worthwhile exercise. With each company’s reporting, watch for a) which issues the company is focused on, and b) how and why each company believes these are relevant. Many companies are doing great things with respect to their ESG strategy but do not get full credit for their efforts because they do not clearly or effectively communicate what they are doing in a manner digestible by stakeholders. A good reporting strategy will help ensure that your stakeholders acknowledge your company’s ESG efforts.

There is a growing consensus that a company’s ability to generate shareholder returns over the long run is at least in part dependent on its relationships with key stakeholder groups -- e.g. customers, employees, suppliers and the communities in which you operate. More broadly, it also suggests a way of thinking about how those returns are generated – delivering value to customers, with due regard for the environment; fostering an inclusive and motivated workforce, dignity and respect in the workplace, fair and ethical treatment of suppliers, and support for and from the communities in which the company operates.

Identifying your key stakeholders: Deciding who your company’s stakeholders are is an important step in developing and implementing an ESG strategy. Some of your stakeholders will be obvious – such as investors, employees and customers. Others can be more challenging to identify. One commonly-used framework, the GRI Standards (see section 7 for further details), provide some guidance in this regard, suggesting: “Stakeholders are … entities or individuals that can reasonably be expected to be significantly affected by the reporting organization’s activities, products, or services; or whose actions can reasonably be expected to affect the ability of the organization to implement its strategies or achieve its objectives”.10

Other stakeholders companies may consider:

These lists are not exhaustive, and each company should apply its unique perspective to determine who its most relevant stakeholders are.

Measuring current engagement: Once your stakeholders have been identified, the next step is to ensure the company has mechanisms in place for stakeholder engagement. One primary purpose of stakeholder engagement is to identify how stakeholders think about the company and its conduct as it relates to their interests. In addition, this engagement can help the company identify key ESG issues that are likely to impact your company’s performance directly or indirectly and to appropriately manage stakeholder expectations and concerns.

Your company may already conduct some level of proactive stakeholder engagement, which can help your company identify new opportunities and enable more effective risk management. It can also build trust. It may not be possible to keep all stakeholders happy all of the time, but if stakeholders feel their perspectives are considered and that they have avenues to raise concerns, then it may make trade-offs more palatable.

Tools for stakeholder engagement include:

The concepts of stakeholder identification and engagement are not new. For example, many companies, having identified employees and customers as key stakeholders, already do employee and/or customer satisfaction surveys. Applying an ESG lens to this inquiry may simply expand the scope of stakeholders that are considered and the nature of the conversations that are held.

Stakeholders and ESG reporting: Identifying the company’s key stakeholders allows the company to make informed decisions about what to report and where to report it, allowing you to present information in a way that is most relevant to each audience. Second, some users of ESG reporting are interested in understanding who your company thinks its key stakeholders are and how you are managing those stakeholder relationships. Finally, displaying how the company performs with respect to metrics relevant to these stakeholders can help build trust.

As the company progresses in the ESG process, it will likely seek to revisit its stakeholder engagement program periodically as it seeks to both communicate its approach to issues as well as listen for new emerging issues.

The concept of materiality is often used in an SEC reporting context to identify what information companies should disclose, and traditional definitions of materiality tend to focus on investors as the primary users of reported information. However, a similar concept of materiality might reasonably be applied to determining which ESG issues should be presented to a broader set of relevant stakeholders. In essence, materiality is a lens or filter that allows your company to determine the ESG issues on which your stakeholders focus. Of note, the Corporate Reporting Dialogue (CRD) suggests that ”(m)aterial information is that, which is reasonably capable of making a difference to the proper evaluation of the issue at hand.”11 This perspective encompasses a range of stakeholders and is aligned with the idea of broad stakeholder accountability.

It is therefore important to decide how you define materiality for your purposes when reviewing the issues that are relevant for your ESG program. Some definitions focus solely on issues that are deemed to be financially material i.e. to focus on the ESG issues that impact your financial performance. Others also consider the impacts that your company has on society and the environment. Some use the term “double materiality” to describe the idea that companies consider both the ESG issues that impact your company as well as your company’s impact on society/the environment. Still others suggest this distinction is a moot argument as company value creation can only be understood in the context of its operating environment and the impacts it has.

Regardless of whether your company is focused solely on financial risk and opportunity or impact more broadly, the other key input to your materiality determination is the perspective of key stakeholders. As discussed in the previous section, your company’s stakeholders can have a significant impact on your ability to generate returns. Stakeholders also provide valuable insights to your company’s impacts (both positive and negative) which your management team may not be fully aware.

A materiality map or matrix is a useful tool for representing how your company has gone about evaluating and prioritizing the company’s salient issues. Typically conceived on a grid (e.g. importance to stakeholders, measured alongside importance to business success or importance to stakeholders and significance of environmental, social and economic impacts12), it allows users to plot the topics according to their importance. It also provides insight into why the company has chosen specific issue areas on which to focus.

Governance can be understood as “the system by which companies are directed and controlled.”14 It includes the oversight structures and processes that set company objectives, measure progress and evaluate results. Strong governance of ESG issues and ESG reporting is key to the efficacy of ESG programs and credibility of ESG reporting. More importantly, good governance of ESG requires that ESG statements have clearly-defined owners to provide accountability and allocate clear responsibility for various aspects of the strategy. Examples of good practices in ESG governance include:

Board oversight

The Board of Directors is ultimately responsible for overseeing the company’s strategy, risk management and corporate reporting. One of the ways in which companies can demonstrate commitment to ESG and meaningful ESG reporting is by having Board-level oversight of relevant aspects of ESG. This oversight may include Board consideration of feedback received from stakeholder engagement exercises, and endorsement and review of progress against the company’s ESG strategy. No matter what, a clear line of oversight should be evident to any external viewer - whether the entire board or specific committees have that set of responsibilities should be clearly disclosed.

The Board may also stipulate the inclusion of key performance indicators related to achievement of ESG targets (such as emissions reductions or energy use improvements) in assessing management performance.

With governance in place, the company can now look at areas where it can build an ESG lens into reviewing risks and opportunities.

Management committees / working groups

Below the board level, responsibility for design, implementation and monitoring of the company’s ESG strategy should be clearly allocated by senior management. Depending on the nature of the strategy and the identified ESG focus areas, responsibility may be spread across various divisions in the company (e.g. HR will be responsible for diversity, while Compliance may be responsible for whistle-blower and anti-corruption measures).

It may be desirable to have a dedicated multidisciplinary sustainability team responsible for:

Note that the best structure will vary depending on the issues involved as well as the company’s business lines - especially when it comes to areas where ESG presents business opportunities, integration of ESG is not just a risk management exercise.

Having identified the company’s stakeholders, determined the key ESG issues, and established governance and operational practices, you should be ready to begin your reporting process. Your ESG reporting is the company’s opportunity to tell its story. To effectively articulate the company’s story, you should consider setting out:

Companies that provide this disclosure are likely to be more convincing than those that produce a long list of ESG metrics that appear unconnected to the company and how it operates. In adopting a more focused approach, your company can demonstrate that it has a strong handle on the ESG issues and is committed to managing them effectively. A concise, well-thought thorough description can be as compelling as, if not more so than, a lengthy publication with extensive disclosures across a range of topics. While this awareness is relevant for all companies, it should be particularly reassuring for smaller companies or companies who are new to ESG and ESG reporting.

Your company may also want to think about where and how you communicate relevant ESG information, depending on the audience. If your company chooses to provide focused disclosure for different stakeholder groups, be careful to ensure consistency across your disclosures (e.g. differences in diversity rates can be attributed to a metric that is regulatorily defined in a particular jurisdiction in one way, while the company, for its own purposes, uses another that it believes is more relevant).

Ongoing stakeholder engagement

Companies should look to formally refresh the materiality process and the message for two-way stakeholder engagement as their stories evolve. Keep in mind your stakeholders may face their own changing demands for information. As one example, as of 2021, European asset managers face new regulations with respect to reporting on the ESG characteristics of their portfolio companies. These “second-order” effects may flow downstream to the issuers of securities in these portfolios, who may face disclosure demands in line with these regulations. For each stakeholder group, listening for the changes in the issues and topics mentioned, as well as sharing feedback formally within the company, should become a standard process.

Navigating the disclosure landscape

Many companies choose to align their sustainability reporting with one or more ESG frameworks. The sheer number of ESG frameworks and standards can make ESG disclosure seem overwhelming. The best way for companies to navigate this landscape is to figure out what would yield the most meaningful and useful disclosure for the company and its key stakeholders. This analysis requires understanding:

A framework is a set of principles and guidance for “how” a report is structured. Standards provide specific, replicable and detailed requirements for “what” should be reported for each relevant topic.

Aligning your disclosures with one or more frameworks or standards should be a deliberate decision - and based on your materiality assessment above as well as stakeholder feedback. Some stakeholder groups have publicly endorsed specific reporting standards - make sure you’re aware of these in your decision-making process.

The list below is an overview of some of the most widely-used or -referenced reporting frameworks as well as some more recent standards. It is not comprehensive nor should it be read as recommending one set of standards over another - and note that each standard references the stakeholder groups it is designed to be relevant to.

Global Reporting Initiative (GRI)

The GRI Standards provide a framework and set of supporting standards covering a wide range of sustainability topics. The GRI Standards consist of the so-called Universal Standards and 34 topic-specific standards. The Universal Standards cover disclosures about the organization’s specific context, such as its governance, management systems, reporting practices, products, services, stakeholder engagement and management approach. Each of the Topic Standards specifies a combination of qualitative and quantitative information to be disclosed.

Companies are not required to report on all topics covered by the GRI Standards. Rather, companies using the GRI Standards are expected to identify and prioritize the topics that reflect their most significant economic, environmental and social impacts or that would substantively influence the assessments and decisions of stakeholders. Companies can either report using the GRI Standards as a complete system or use them to report on selected topics.

GRI Standards are multi-stakeholder in focus and can be relevant for a range of users anywhere from investors to governments to civil society.

Sustainability Accounting Standards Board (SASB)

The SASB Standards are focused on the subset of sustainability-related risks and opportunities most likely to affect a company’s financial condition (e.g. its balance sheet), operating performance (e.g. its income statement) or risk profile (e.g. its market valuation and cost of capital).

SASB publishes standards for 77 industries across 11 sectors. set of standards identifies the subset of sustainability issues SASB believes are reasonably likely to impact financial performance of the typical company in an industry. Companies are encouraged to refer to the relevant SASB standards for their industry but ultimately it is up to the reporting company to determine which specific sustainability topics and metrics are financially material for its business.

Given SASB’s stated focus on financial materiality as defined by the U.S. Supreme Court and the SEC, investors are the primary audience for SASB reporting.

Task Force on Climate-related Financial Disclosures (TCFD)

The TCFD Recommendations provide a framework for climate-related financial disclosures, with the objective of enabling users to understand how reporting organizations assess climate-related risks and opportunities. The framework is structured around four thematic areas: governance, strategy, risk management, and metrics and targets, with high-level recommended disclosures under each of these. The TCFD encourages reporting companies to undertake and report on the results of climate scenario analysis as part of their strategy and risk management processes. While the TCFD offers guidance around the type of information that should be disclosed, it is principles-based, and does not prescribe the specific metrics that should be used for such disclosure. Standard setters such as GRI, SASB and others have done work around mapping their standards to the TCFD.

Given the focus on ”decision-useful, climate-related information,” investors, lenders, and insurance underwriters are the primary audience for TCFD reporting; to date, several national governments have relied on them for regulatory requirements as well.

World Economic Forum – International Business Council (WEF-IBC)

The WEF-IBC Stakeholder Capitalism Metrics and Disclosures are comprised of a set of 21 core ESG metrics and 34 recommended disclosures organized into the categories of Principles of Governance, Planet, People and Prosperity. The proposed metrics and disclosures are largely drawn from existing standards (such as GRI, SASB, TCFD and others) with the stated intent of “supporting convergence” among existing standard setters. The WEF-IBC encourages IBC members (and others), regardless of sector or country of operation, to report on these metrics in their mainstream annual reports, if material, on a “comply or explain” basis.

The disclosures are aimed at a range of stakeholders.

In addition to reporting frameworks and standards, there are also third-party research firms that collect ESG information on companies for the purposes of scoring ESG performance. This information is used by investors to inform their investment decision making (though many investors also conduct their own analysis). Some research firms collect information directly from companies, using surveys or questionnaires. Others rely on publicly-available information (though may still ask the company to verify the collected information) while still others use some combination of public information and questionnaires. Different firms use different methodologies (though there is some overlap among them), which makes it challenging from a resource and cost perspective to address all of these. Companies should decide for themselves which ESG data providers/rankers/raters are most relevant for them and their key stakeholders and allocate their efforts accordingly.

Note that several ratings are administered by, or connected to, companies that construct indices for investment purposes. Therefore, consider which ESG indices are of highest interest to your company when determining which ratings to focus on.

MSCI

MSCI ESG Research is based entirely on publicly-available information collated from assorted academic and NGO datasets, company disclosures and media/news sources. Companies that are selected for assessment are typically those companies that are included in the MSCI indices. Companies are not required to verify the information that is collected but are notified at various stages of the ratings update process, giving them an opportunity to engage, and request corrections, if they wish to do so.

Sustainalytics

Like MSCI, Sustainalytics relies on publicly-available information for its company ESG assessments. Companies are sent a draft of their ESG report covering all assessed indicators for review and feedback before it is published. Sustainalytics is owned by the investment research firm Morningstar.

S&P ESG / Corporate Sustainability Assessment

The data collected in the S&P Corporate Sustainability Assessment are used as inputs for assorted S&P ESG and Dow Jones Sustainability Indices, compiling the SAM Sustainability Yearbook and calculating S&P Global ESG scores (among other uses). Participation is by invitation and requires the completion of a questionnaire. In addition to possible index inclusion, companies can also see how they perform relative others in their industry. Companies that don’t complete the questionnaire may be nonetheless be rated regardless based on publicly-available information.

Moody’s / Vigeo Eiris

Vigeo Eiris offers a wide range of ESG products to the investment community, including assessments of a company’s ESG practices as well as a view of alignment with the UN Sustainable Development Goals and UN Global Compact, a measure of sustainable goods and services, as well as controversies data. Information is gathered from public-domain sources, but companies can engage with the organization to make sure their publicly-sourced information is accurately captured. Moody’s owns a controlling stake in Vigeo Eiris.