Major investors are increasingly demanding the world’s biggest brands improve their reporting on climate and environmental risks.
The Carbon Disclosure Project has announced almost 170 investors and financial institutions – representing a cool US$17 trillion in assets – have signed on to its 2021 Non-Disclosure Campaign, calling on more than 1,300 companies with high environmental impact to make clearer risk disclosures.
The targeted companies cover over US$28 trillion in global market capitalization across a range of industries, and between them emit an estimated 4,700 Mt of carbon dioxide equivalent annually – “more than the entire European Union.” They include global heavyweights like Facebook, Amazon and Tesla. On the list are 35 Australian companies, including Qantas, Wesfarmers and Tassal as well as large resource and industrials such as AGL Energy, BHP, Woodside Petroleum, Santos, Boral, OZ Minerals.
In the same vein, last year the world’s largest asset manager BlackRock announced it was “making sustainability integral to the way BlackRock manages risk, constructs portfolios, designs products, and engages with companies. We believe that sustainability should be our new standard for investing.” Transparent ESG reporting is key to this.
So what is ESG reporting, why is it such a hot topic, and is it something your business should consider?
What does ESG mean? Environmental, Social and Governance (ESG) reporting involves intangible asset metrics affecting a company’s future value. It considers both material risks and opportunities for growth. The goal is to measure the sustainability and societal impact of a business.
According to PwC, “Stakeholders are demanding companies to be more transparent about their performance… The term ‘ESG’ goes beyond environmental issues like climate change and resource scarcity - it encompasses all non-financial topics that are not typically captured by traditional financial reporting.”
Examples include:
Source: PwC
ESG is not a new concept. Funds have been investing in schemes with broader social benefits for decades. Concepts around social capital, the “triple bottom line” and corporate social responsibility emerged in the 1980s and 90s and gained momentum into the 21st century. The Global Reporting Initiative was founded in 1997 and has developed “the world’s most widely used standards for sustainability reporting”, and the United Nation’s Principles for Responsible Investment (PRI) report first mentioned ESG issues in 2006.
In 2020 the World Economic Forum (WEF), International Business Council (IBC) and big four accounting firms (Deloitte, PwC, KPMG & EY) set out to create a standardised ESG measurement and reporting framework. It’s structured to align with the UN’s 2030 Agenda for Sustainable Development.
And the momentum continues to grow in 2021, “driven by the systemic risks revealed by the COVID-19 pandemic, social justice issues amplified by the Black Lives Matter movement, and continuing focus on climate change. Companies, asset managers, asset owners, governments, and policymakers recognize that ESG factors are financially material.”
Why is ESG reporting important for your business?
In short, ESG reporting is becoming unavoidable. Investors are demanding a more wholistic view of a company’s risk and opportunity profile. The latest ASX Corporate Governance Council Principles & Recommendations report offers guidance on how companies should manage eight governance principles. Principle 7: Recognise and manage risk states “A listed entity should disclose whether it has any material exposure to environmental or social risks and, if it does, how it manages or intends to manage those risks… How an entity manages environmental and social risks can affect its ability to create long-term value for security holders. Accordingly, investors increasingly are calling for greater transparency on the environmental and social risks faced by listed entities, so that they in turn can properly assess the risk of investing in those entities.
The Carbon Disclosure Project says “investors and financial institutions require environmental disclosure from their portfolio so that they can understand and manage their direct operational as well as financed environmental impact.” This is important for investors to meet their own net-zero commitments.
In addition, ESG metrics don’t just concern your annual reporting to stakeholders. It also comes into play when conducting due diligence into the risks involved with specific business investments or asset acquisitions.
How do I get started?
PwC says a major challenge for companies looking to improve their ESG reporting is the myriad reporting frameworks that currently exist, which “create a challenge for investors and other stakeholders as they result in a lack of comparability and consistency in ESG reporting, both locally and globally” and triggered the WEF push for harmonisation.
A recent PwC analysis found:
1. ESG reporting falls short of the standard for financial reporting, and therefore below stakeholder expectations: investor demand is highlighting that the expectation for ESG reporting is that it be as important as financial reporting and of the same standard.
2. Companies need to reshape how they think about and report on their corporate strategy: The needs of stakeholders extend beyond financial reporting into broader corporate reporting. To truly meet this need, clear reporting of integration of ESG into core strategy is needed to demonstrate to stakeholders the non-financial aspects that are also critical to the company’s success.
3. Lack of clear targets and accountability limits trust: For companies to be trusted to meet their stated ESG commitments, it’s becoming increasingly important to identify performance indicators for material ESG topics, set targets for performance, and allocate accountability for these targets, including linking executive remuneration to achievement.
4. Integrity of ESG reporting needs to be upheld: For ESG reporting and non-financial reporting to be equivalent, the information reported therein must be drawn from comparable systems, processes and controls, with appropriate governance.
Ellis Richmond can help you navigate the ESG reporting landscape and map your own non-financial risks and opportunities. From there we can assist in developing strategies and tracking performance against key non-financial metrics to help you achieve your ESG objectives. Not only will this inform your own strategic planning, but also provide certainty and transparency for investors and stakeholders.
Get in touch!