Without substance, big statements about environmental, social and corporate governance (ESG) issues could cost you more than you think. Simon Lowe explains why meaningful ESG reporting is so vital.
With public sentiment, incoming regulation and investor engagement driving the discussion, as well as 59% of the UK’s largest companies publishing a good level of detail on the topic, everybody is talking about ESG. And that’s part of the problem.
Making sense of the noise around ESG trends is becoming increasingly difficult and it's masking a worrying lack of meaningful action. Our 18th Corporate Governance Review (CGR) highlights this disparity, revealing that while a growing number of businesses are reporting on ESG issues, the number actually linking action back to purpose and long-term strategy is much lower. If you’re interested in building your business’s resilience, that’s an imbalance you need to address.
There’s an important distinction to be drawn between simply reporting on any ESG-related initiatives around your business and communicating a clear strategy for tackling ESG issues that will directly affect you. The former can give the appearance of engaging with this fast-moving topic, but only the latter can properly prepare your business for what’s going on and what's just over the horizon.
Taking the long view on ESG reporting
These are turbulent times. New risks, as well as opportunities, continue to emerge from surprising directions, making horizon scanning more important than ever. From the need to recruit skills and talent from outside your industry, to the effect climate change will have on supply chains, the ability to identify problems early will be key to mitigating them. Ensuring that any strategy you develop ties back to your purpose is increasingly as important as creating that strategy, particularly doing so in a way that all your stakeholders, including your investors, can understand.
The information gap is real
These are complex issues; companies aren’t always certain what information investors want, while investors report they aren’t getting access to the information they need. In the face of such uncertainty, the importance of high-quality, transparent, reporting, rooted in company purpose, can’t be overstated. And neither can the risks of not providing it. When investors like BlackRock are using sustainability as a basis to re-allocate capital, their key customers are incorporating such factors into their selection processes and the next generation of talent are looking for employers with strong ESG credentials, the challenge to companies is clear - tell us what you are doing, exactly how you are doing it and why.
ESG reporting gives the full picture
When it comes to ESG trends, companies need to do better at explaining which issues they see as specifically important to them, why and, ideally, how they came to those conclusions; what level of assurance is in place to support those determinations? They need to show how they’ve tied that work back to strategy, to either protect or add value to the business and be clear about how they’ll measure any success; what the specific KPI’s have been set against ESG questions. Ultimately, that information needs to be made available and one of the best places to tell that whole story is in your accounts.
What gets measured, gets managed
No one is saying that your accounts are the be-all and end-all of your communication around ESG issues. Investors will always want more information - often of a very specific nature - that companies will find time-consuming to prepare. There will never be a one-size-fits-all document to provide it, but your accounts remain your best shop window, providing a clear statement of intent and an indication of your commitment to meaningful action. The best top-line indicators include:
The outgoing head of the Bank of England, Mark Carney, calls it the “tragedy of the horizon”, yet only 20% of UK businesses see the environment as a risk to strategy - and climate is just one part of a much bigger picture. Clearly acknowledging the risk presented by social and environmental changes shows a tangible engagement with the wider issues.
Setting non-financial KPIs
If you’ve identified an environmental issue as a risk to the delivery of your strategy, but haven’t set a KPI against it, the message you’re sending is that you’re not taking the problem seriously. What’s measured gets managed.
Linking remuneration to non-profit-related goals
It’s the big one, and an immediate indication of your commitment to meaningful action. Remuneration is always a thorny issue, but that is why it is also such a powerful statement of intent. Rewarding people against the delivery of the ESG issues that you say are important for your business undermines any commitment you make to a wider purpose.
Without ESG reporting, statements are little more than lip service
Without the proper thought, commitment and investment, reporting on ESG amounts to little more than lip service. It may solve the short-term issue of appearing to engage with the topic, but in the long run, it will leave you exposed to a volatile landscape and could cost you dearly in terms of investment. Also ask yourself, what message does scaling down your commitment to ESG in response to the challenges you're currently facing say about your trustworthiness? An opportunity has presented itself to truly demonstrate your commitment to a refreshed purpose. Will you take it?
So what’s the next step? In the absence of a common metric and a question mark over whether combining E, S and G does anything but cloud the conversation around these seemingly very different topics - one answer is benchmarking. Knowing how you are performing in comparison to your peers and gleaning best-practice insight on ESG reporting can inform your own approach. It can move you towards meaningful action, effective reporting and the tangible benefits of both; and what’s more, we can help.
To find out more about how our benchmarking offering provides insight on best practice and how you compare to your peers, contact Simon Lowe.