ESG and Sustainability Reporting – are you engaging your investors?

ESG and sustainability reporting are entering the mainstream, with developments in regulation and accounting practice. However, as new research from the PRI (Principles for Sustainable Investment) shows, there is still confusion and complexity in the market and when it comes to direct engagement with investors, companies need to put clarity, consistency, and materiality at the heart of their approaches to ESG management and disclosure. 

Joss Tantram, Partner at Terrafiniti, reviews emerging regulatory guidance for ESG reporting and sums up the fundamentals of how to make good disclosure for all stakeholders, and investors.

Investor focus is moving… and gathering pace

Investors have long been a key but underserved audience of corporate sustainability and ESG communication. Even with the rapid growth (more than 1/3^rd of all assets in the world’s five biggest markets) of investing that has some element of focus upon ESG and sustainability, many companies remain nervous about how and what to communicate to their investors.

Set against this challenge, the increasing focus of regulators, especially in Europe, to clamp down on greenwashing in “sustainable” finance practice, means that investors are under pressure to more meaningfully demonstrate how their investment choices are in companies and sectors that are either truly more (potentially) sustainable than others, or are actually engaging in real sustainable transformation.

As a result, investors need to be able to demonstrate that their ESG/sustainability funds deliver meaningful support, engagement and change in the portfolios that they hold and in the company practice within these portfolios.

But what is meaningful corporate information? The picture remains unclear

Investors have long been a key but underserved audience of corporate sustainability and ESG communication. Many corporate sustainability and ESG reports are still stronger on rhetoric than on providing a clear picture of sustainability issues, impacts and risks. In addition, there are still challenges in how companies identify which of these issues, impacts and risks are material to the company and why, how the company connects to the big picture of environmental and social trends and thresholds and what the company’s targets, and performance are for their material issues.

This is despite the changes that are happening in the sustainability/ESG reporting world, with the introduction in the EU of the CSRD (Corporate Sustainable Reporting Directive) and the release by the IFRS’s ISSB (International Finance Regulatory Standards’ International Sustainability Standards Board) of exposure drafts for their General Requirements for the Disclosure of Sustainability Related Financial Information and for Climate-related Disclosures.

The PRI (Principles for Responsible Investment) research “Review of Trends in ESG Reporting Requirements for Investors” highlights a significant global growth over the last decade of ESG Reporting Instruments (regulation, guidance, and requirements for the disclosure by either investors or corporates or ESG/sustainability information). Between 2011 and 2021, the PRI found that the number of such corporate disclosure instruments rose from 10 in 2011 to just under 70 in 2021, with the emergence of a number of “high regulation jurisdictions” with significantly more requirements for ESG disclosures for both investor and corporates. Such jurisdictions comprise the EU, France, Hong Kong and the UK.

The focus of this increase in disclosure requirements is shifting, characterised by the PRI as a move from “Tell me” to “Show me”. This means that, instead of regulators and investors merely wanting information on policies and approaches to the identification and management of sustainability/ESG issues, there is now a requirement to demonstrate actual reductions in impact and alignment with climate benchmarks.

What information is useful for investors (and companies)?

Whether you are using the perspective of an investor, or of strategic corporate management, the approach to identifying what information is useful to tell you something meaningful about a company’s risks, approach and performance is consistent.

For investors

The PRI’s Driving Meaningful Data Framework (intended to enable an expanded assessment for investors and corporates…. to translate social and environmental goals into day-to-day decisions). identifies 3 fundamental dimensions of information that companies should provide:

1. ESG risks and opportunities – ESG factors likely to impact the financial condition or operating performance of an entity (financial materiality).
2. Sustainability performance – How an entity’s operations and products impact (positively and negatively) stakeholders and the environment.
3. Social goals and planetary thresholds – Nationally, regionally, or internationally recognised environmental and social targets, norms and responsibilities within which entities operate from a sustainability perspective.

For companies

Most companies will use some sort of framework or frameworks when it comes to formal sustainability/ESG reporting, but when it comes to direct engagement with investors the information that should be at the heart of your communication should be as follows:

1. Context – what resources and conditions do you depend on and what changes are you vulnerable to?
2. Materiality – What are your material issues and how have you defined them?
3. Intentions – what is your vision and ambition for sustainability and how will you achieve it?
4. Performance – what is your current performance and what are your goals for driving impact reductions?
5. Outcomes – how does your approach drive financial performance and how does this manifest for your business, e.g., revenue growth, business unit outperformance, cost efficiency or customer retention and sales growth?

How to make your reporting more meaningful?

While there are significant developments occurring in the regulations and requirements for companies to consistently disclose information on their sustainability/ESG approach, issues and performance the fundamental of what makes good disclosure to all stakeholders, and investors in particular remain relatively unchanged.

For companies developing stand-alone, integrated or informal reports to stakeholders, always bear the following in mind:

• Reports are not a goal or an outcome on their own, they are a story of the focus, approach, and performance of your management of sustainability, and the ESG issues which are of key importance for stakeholders.
• Materiality is key – what is important, why and what are you doing about it – share your approach to identifying and prioritising material issues.
• Focus on what it all means – for your risk, your sustainability and financial performance and your business prospects.