John Truzzolino is director of corporate governance services for Donnelley Financial Solutions. Views are the author's own.
Emerging growth companies and established businesses are vying for investor attention and learning a vital lesson — the criteria for capturing the attention of the investment community have changed. Today, it’s not just about dollars and cents. It’s also about the business’s environmental, social and governance (ESG) messages.
If you’re a skeptic who doubts just how much the investor community values ESG, consider this statistic from the U.S. Forum for Sustainable & Responsible Investment, “In early 2020, $16.6 trillion in U.S. professionally managed assets employed some form of ESG screening.” That figure was up more than 40% from 2019.
This growth naturally waned a bit during the early days of COVID. That’s when the business world shifted into a survival mode mentality. But as we slowly return to normal, it’s clear the pandemic has ignited demands from investors that portfolio companies increase and expand their reporting.
The focus on ESG is an essential development for the industry but, in its clamor for more reporting, investors failed to provide guidance. This includes where to begin, what matters most and what types of information they should disclose on their website, in the proxy, 10-K and other channels.
In this void are groups of companies staring at ratings, rankings and frameworks with little to no clarity on where to start. Help is coming.
A group of organizations is working to develop voluntary reporting standards. These include the CDP (formerly the Carbon Disclosure Project), CDSB (Climate Disclosure Standards Board), IIRC (International Integrated Reporting Council), GRI (Global Reporting Initiative), SASB (Sustainability Accounting Standards Board) and TCFD (Taskforce on Climate-related Financial Disclosure).
When solidified, these standards will go a long way to providing the guidance businesses seek. Still, it will take time, which is something companies don’t have a lot of with an investment community that demands action now. To get ahead in this ESG journey, start by following some steps that are widely recognized as effective:
- Focus on your material indicators. There are multiple sets of frameworks available, and while each one is different, they overlap. Our company, which helps companies meet financial compliance challenges, recommends focusing primarily on SASB, GRI and TCFD and seeing where these connections exist. Next, determine five to seven material indicators relevant to your industry group and for which you have information to disclose, such as climate, labor, human capital, social inequality, sustainability issues and so on.
- Examine peer disclosures. Check on your industry peers and specifically their disclosures, including proxy, 10-K/AR, website. These are an excellent resource for uncovering important topics to your industry that may not have been identified in step 1. From there, assess what actions the business needs to take to match or exceed the peer accomplishments.
- Create your thematic principles. Between the material indicators and peer-related research, the team should have identified anywhere from seven to 10 topics. Eventually, these will be the foundation of your disclosures. First, have your communications team turn these into three to five thematic principles. For many, these are what I like to call “three Ps tenets” — people, purpose and planet.
- Develop your ESG content. Build content around these principles that meet the criteria discussed earlier. Bring in ESG consultants, analysts and writers to help, and have them work collaboratively on these pieces.
- Think visually. As a last step, I recommend turning this ESG content into infographics that mirror or are complementary to company branding.
After completing these steps, shift to disclosure. Here are suggestions on what to disclose and where.
For many, the logical and easiest starting point is your website. You can post all of your company’s policies, covering data privacy, workplace health and safety, equal opportunity, and anti-harassment/discrimination, among others, in as much depth as you like. You can also include this information in your Investor Relations section.
Proxy statement highlights
For some companies, disclosure might start with the proxy, where businesses can share critical highlights that could impact influential ratings and rankings. Some areas to feature:
- Board oversight. If your business has a committee in charge of board oversight, list them here along with their competencies and qualifications. In addition, you might want to report on the diversity of the board itself. One thing to keep in mind is that investors often look for multiple views, such as a breakdown of ethnic and racial diversity and another focused on gender.
- ESG and human capital program overview. The proxy should include the same programs and policies from the website, but just the top highlights, including potential risks, opportunities and priorities and performance in these areas.
- Executive compensation. Any ESG-related compensation metrics should be highlighted, such as health and safety, employee development and diversity initiatives.
- COVID impact statements. Focus on your COVID-related efforts such as employee health and safety, remote work and efforts to maintain productivity and morale.
Integrated reporting that features financial reporting and a company’s operations and non-financial data isn’t as prevalent in the U.S. as in other countries, but this should not preclude you from including these details if you want. This information will always have an audience with investors who are looking for additional factors when making decisions.
Regardless of what you do, keep an eye on the SEC’s calls for a principles-based approach to human capital disclosures. Part of SEC rule S-K modernization, these disclosures could eventually call for companies to include human capital resources and any human capital measures or objectives (that are a focus of managing the business) in their 10-K or other fillings. Examples here include the number and types of employees with a specific breakdown into areas such as full-time, part-time, seasonal and temporary workers.
The corporate social responsibility (CSR) report
These reports represent the best opportunity to showcase the company’s complete CSR story. Be sure to include details on programs and how they are impacting the environment and community. This is not a one-size-fits-all approach either. Businesses can choose which format suits them best. For one, it may be a short six-page SASB fact sheet, while for others it could be a 20-plus page summary sustainability report.
There is good reason to be encouraged about the creation of universal ESG reporting standards. These will likely include the guidance that businesses require. But companies should not wait until standards are formalized. With the insights provided here, you can begin your ESG journey today.