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Environmental, social and governance (ESG) reporting is a challenge for private-sector firms. Although signatories to the United Nations Principles for Responsible Investments (UNPRI) network are required to present their ESG-related disclosures to the governing body annually, voluntary ESG reporting remains a challenge. What is ESG reporting? It can be described as disclosing information publicly on a company’s performance and strategy in terms of ESG matters, in the form of an annual report or a sustainability report.
Challenges faced when reporting
Although some companies have long histories of responsible investing and publishing annual sustainability or ESG reports, others have just begun their journey towards sustainability. Firms new to the concept struggle to incorporate ESG issues in their investment decision making.
Even as ESG disclosures have become increasingly relevant, companies still find it difficult to determine what should be disclosed and how best to disclose it. Often, a gap exists between what information a company discloses to its stakeholders and the data actually required for investment decision making.
Private-sector companies face ESG disclosure challenges mainly due to the absence of a regulatory mandate or global reporting standards, although such standards exist for public-sector companies. ESG reporting frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD), Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and International Integrated Reporting Council (IIRC) provide guidance on ESG reporting styles and standards.
ESG disclosure is an accepted practice in the US and Europe, and investors are increasingly using the information in their decision making processes. In recent years, companies reporting on their ESG efforts have been disclosing not only their performance in terms of ESG matters, but also the strategy behind such performance, making risk assessment easier for investors.
Benefits of ESG reporting
Good ESG practices are associated with lower cost of capital, lower stock price volatility, and better valuation over the long term. Other benefits include the following:
- Improved brand reputation: Greater transparency helps stakeholders understand a company’s non-financial and financial performance, improving its credibility, image and reputation in the market
- Investor attraction: Good ESG reporting displays a company’s approach towards managing its risks and challenges, further reducing its financial risks and making it an attractive proposition for potential investors
- Enhanced risk management: Good ESG reporting enhances a company’s ability to analyse, prepare, manage and reduce potential risks
- Competitive advantage: Reporting periodically on ESG matters helps raise a company’s business profile and gain competitive advantage over peers
- Improved stakeholder engagement: Identification of and engagement with stakeholders are fundamental to sustainability reporting. Stakeholder engagement enables the company to take into account the information needs of various stakeholders with regard to the disclosure of sustainability information
Best practice for effective ESG reporting
When disclosing information on ESG factors, the following practices can serve as a guide to good reporting in the absence of a reporting framework:
KNOWING THE AUDIENCE
It is essential to know the audience or the intended recipients of the report. The first step is to identify stakeholders such as employees, investors, vendors, and competitors and understand their expectations through stakeholder engagement. It is possible that the information required for ESG reporting is held by internal stakeholders
LIAISING WITH RELEVANT DEPARTMENTS
Before reporting on ESG information, relevant data can be collected by liaising with different functions and departments within the organisation. It becomes easier to collect data if it is known which department has the relevant information. It also helps the preparer of the report to adapt the ESG information to different stakeholders’ requirements
IDENTIFYING MATERIAL ISSUES
The company should identify ESG issues that are material to it and are industry-specific. Relevant issues can be identified by conducting a materiality analysis and compiling a materiality matrix from the company’s and stakeholders’ standpoint. An explanation of how and why the chosen metrics are relevant for the company must also be included
REFER TO GLOBAL REPORTING STANDARDS
If possible, an issuer should refer to the globally accepted standards and reporting frameworks such as the GRI, CDP, TCFD and SASB. Understanding these frameworks helps define the reporting structure
FOCUS ON RISKS AND OPPORTUNITIES
The information to be disclosed should talk about the company’s risks and opportunities associated with the ESG issues as well as its risk management strategy. It should also focus on a company’s long-term business value creation and its operational and financial performance
ESTABLISH LONG-TERM ACTION PLAN
The company should set long-term goals that are measurable and achievable in nature. The report should also include the organisation’s long-term plans. Establishing a long-term strategy makes it easier for investors to understand the company’s vision, goals and achievements
EXTERNAL VERIFICATION OF THE REPORT
Description of an internal review or an audit report of the ESG data should be included in the voluntary ESG filings; this increases the credibility of the reports, based on which corporate decisions can be made
Seeking growth in ESG reporting
Private-sector firms are convinced about the benefits of ESG reporting and the underlying positive impact on their returns. However, such firms are in different stages of adopting ESG reporting and face one or more of the challenges mentioned above. They would, therefore, need to adopt and integrate ESG matters in their reports to all stakeholders — from regulators, investors, and employees to competitors. This would require that they design, adopt and execute a variety of reporting structures to satisfy current and emerging ESG reporting requirements.
Acuity Knowledge Partners has more than a decade’s experience in serving private equity firms across a wide range of themes and support requirements, including sustainability reporting. Its expertise also covers guiding such firms in designing and structuring their ESG reports. Our experts assist asset managers at all stages of ESG reporting — from collection of raw data, identification of material issues, and assessment of risks and opportunities to compiling the output in report format.