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?
Deforestation – a practical example:
In November 2020, the United Kingdom proposed new legislation banning the sale of commodities grown on land that had been illegally cleared.8 Under the law, affected companies would incur the costs associated with compliance including (potentially) the need to restructure supply chains.
Importantly, concerns about deforestation are not new. These issues have been raised by environmental campaigners for decades and more recently moved up the regulatory and investor agenda,9 driven by an understanding of the links between deforestation and climate change and the dangers posed by biodiversity loss. Companies that produce or purchase commodities (such as soy, beef, cocoa, palm oil) and are typically associated with deforestation may face regulatory changes, pressure from investors or other stakeholders. After evaluating these increased risks, some companies have introduced their own measures to enhance product traceability. Some may even have gone as far as to invest (where possible) in certification of commodities to provide greater assurance that these are not associated with unsustainable agricultural practices. These companies that are effectively managing deforestation risks will arguably have a competitive advantage over those that may be simply reacting to legislative changes - in this case, a link from an ESG lens to strategy can produce a directly measurable benefit.
Find out more: Ceres Investor Guide to Deforestation and Climate Change
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.
ESG: What does it mean? Is it all about climate change?
Despite the attention that issues like climate change receive, there is a range of ESG issues that can contribute to company value creation or destruction. Some examples are set out below. More details can be found in leading disclosure standards and frameworks discussed later in this guidance.
- Employee relations and development
- Diversity and inclusion
- Occupational health and safety
- Community relations
- Human rights
- Forced labor
- Data security
- Board oversight
- Board diversity
- Risk management
- Shareholder rights
- Political lobbying
- Executive pay
- Tax strategy
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.