Lowering Your Cost of Capital Through Effective ESG Disclosure – Part IV

Part IV: Reporting frameworks and methods for effective ESG disclosure and the new roles of CFOs and Board Directors

There are several voluntary reporting frameworks and methods that allow a company to disclose ESG metrics in a way that’s similar to FASB and IFRS accounting standards. Those most widely accepted by institutional investors are CDP,  Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures. Another reporting framework that can be used is the UN Sustainable Development Goals (SDGs), although it does not result in a level of ESG transparency increasingly required by investors and ESG ratings firms.

Adopting a reporting framework to publicly disclose ESG metrics usually falls under the direction of a company’s Chief Financial Officer and naturally requires close coordination with a sustainability officer, who is responsible for managing and monitoring a company’s environmental and social impact in accordance with commitments – preferably Science Based Targets – such as using 100% renewable energy sources, known as RE100, or achieving a zero-carbon footprint within a given timeframe.

Because ESG and financial performance are increasingly analyzed together by the investment community, more investor relations departments are being involved in the ESG reporting process. Importantly, a growing number of investors demand board oversight of ESG performance, something that requires the same level of expertise as an audit committee member. Investors, led by Blackrock and Vanguard, increasingly want access to a Board director who can answer pressing questions and hold in-depth discussions about ESG issues related to shareholder proposals and voting; for perspective on this imperative, BlackRock voted against or withheld votes from 4,800 directors at 2,700 different companies around the world last year. This trend within the investment community has created the need for a designated director who has strong familiarity with the ESG performance and commitments of the company he or she governs.

Among the tasks necessary to achieve and maintain effective ESG disclosure is identifying which sustainability risks are material to investors and the management of risk, and therefore what data, metrics and key performance indicators need to be collected from a company’s operating areas, then compiled and publicly disclosed; materiality varies by industry, of course. ESG performance can also have a bearing on financial reporting – such as the reduction of energy costs through on-site installation of solar panels – and should be clearly linked in any explanation of performance in earnings announcements and annual reports, as well as during discussions with analysts, investors, banks and ratings agencies. This would include conversations about a company’s business strategy, planned capital expenditures and risk management, among other matters related to shareholder value.

Effectively integrating a company’s ESG story into its investment story is becoming a crucial part of interactions with the investment community today.  InspIR clients tell us that practically every meeting with European investors includes discussions about their company’s ESG performance and commitments.  Given the growing frequency of these conversations, the CFO and IRO must be well-informed, as they will not always have the sustainability officer readily available to answer investor questions.

For context and to see what best-practice ESG disclosure actually looks like, here are several companies that are considered to be at the vanguard of sustainability reporting: Apple, Coca-Cola and Unilever.

Other imperatives for effective ESG disclosure

In addition to achieving credible and reliable external ESG reporting that enables a company to maintain fair market value, effectively compete for capital, and minimize its cost of capital, equally important is that the underlying process can help a company’s CEO and CFO better track, monitor and ultimately manage ESG risks, such as those related to regulation and corporate reputation. A robust reporting system also allows a company to incorporate ESG performance into compensation schemes and thus align decision making with long-term commitments.

ESG reporting can also facilitate benchmarking against other companies and performing gap analyses, helping identify where best to invest to improve ESG performance and stakeholder engagement. Importantly, bear in mind that key stakeholders outside the investment community will increasingly monitor your performance over time, such as consumers, commercial customers, regulators, as well as current and prospective employees. Here too, effective ESG disclosure can be highly beneficial.

The InspIR Group can help you learn more about ESG reporting.  Call or email us if you would like to set up a workshop for management or discuss customized projects to initiate your journey to develop best practices in ESG reporting.

Ivan Peill, New York – ivan@inspirgroup.com, +1 212.710.9296 

Fabiane Goldstein, São Paulo – fabiane@inspirgroup.com, +55.11.98103.0201

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