A guide to developing your ESG Disclosure

Anyone with one eye on the emerging business sector will tell you that ESG (environmental, social and governance) criteria – a set of standards used by socially conscious investors to screen potential investments – are becoming an established measure of corporate performance on the world stage. It is increasingly expected amongst stakeholders that companies commit to constant improvement on areas such as climate change, diversity of staff and executive pay.

Within this climate, premium listed companies in the UK are now obliged to both disclose their ESG performance data and acknowledge the extent to which they meet TCFD (Task Force on Climate Related Financial Disclosures) recommendations. Whether all other listed UK companies will soon be required to follow is contingent on ongoing government consultation.

Some companies have taken to viewing ESG disclosures as another opportunity to push their values in the public realm. New reporting mechanisms are being established through which companies, whilst identifying their ESG-related risks, present their narrative for long-term stakeholder value. In essence, this is not different to the risk management that companies, in the face of shareholders and stakeholders, have always been expected to do.

In spite of this, widespread confusion still reigns over how to effectively incorporate ESG into a well-established business model. Where exactly to begin? Which standards to take precedence over the rest?

Firstly, a company’s ESG agenda must be granted space in their ongoing board and meeting cycle. Increasingly, directors ought to be aware of the material risks posed by ESG issues like climate change, income inequality and scarcity of resources and, more crucially, their influence over stakeholders.

Depending on a company’s resources, a focus group should ideally be assembled to ensure that ESG-related initiatives are correctly followed through. Representation at board level will ensure that these initiatives are levelled from the top down, signalling to stakeholders that the company are serious about meeting ESG standards and expectations.

Key areas should, then, be prioritised as a company board looks to focus ESG drivers within their organisation. The composition of the focus group should reflect these key areas of concern and vice versa. These include but are not limited to the following;

  • Climate change
  • Executive pay
  • Sustainability
  • Employee diversity
  • Resource depletion
  • Supply chain issues

Once key areas have been agreed upon, decision-making at all levels of the company should be informed by these considerations. Some company secretaries, given their unique access to both board level and internal committee meetings, have been bearing the responsibility of overseeing their organisation’s holistic ESG strategy – ensuring that all relevant information, initiatives and risk mitigation measures are being taken at every level of the company.

Director onboarding is, for example, an opportunity for company secretaries to ensure that ESG issues are included in board inductions. In this instance, by providing an overview of sustainability risks, opportunities, standards, policies and priorities of key stakeholders to new board members, the momentum of ESG-related initiatives is not tempered by personnel changes within a company.

Within these key areas of focus, companies will set key performance indicators (KPIs) by which stakeholders and investors can review their performance. Increasingly, stakeholders and potential investors are looking for more granular detail into why certain KPIs have been chosen. Clearly, it is crucial that organisations do not overwhelm themselves with more KPIs than can be monitored and executed. Wherever possible, KPIs should illuminate stakeholders on where the company stands in relation to its competitors. Whilst not limited to quantitative data, ESG KPIs must be quantifiable.

At present, there is no set way of reporting ESG disclosures within a company. There is an expectation that, as the standards take hold, disclosures will be subject to a universal system of verification to ensure that reporting is both valid and truthful.

Transparency, social consciousness and an eye on the future are, these days, commonplace expectations of businesses amongst stakeholders and wider society. ESG disclosures, before all else, should strive to reassure stakeholders on these three fronts. As investors start to distance themselves from businesses with low ESG prospects, all businesses would be prudent top get on top of their ESG disclosure mechanism.

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