ESG reporting is becoming increasingly investor-grade — and siloed
Author: Aman Singh
ESG reporting is becoming increasingly investor-grade — and siloed
Thu, 02/11/2021 - 02:11
Reprinted from GreenFin Weekly, a free weekly newsletter. Subscribe here.
Environmental, social and governance (ESG) reporting is facing an identity crisis. While reporting itself as a practice in disclosure has expanded dramatically around the world — 80 percent of companies globally report on sustainability — what goes in the report continues to be strikingly disparate across the board.
Yet, 2021 is poised to bring fundamental changes to the primary audience that voluntary ESG reporting serves and what it should embody. Propelled by a crescendo of events, including heightened demand from investors, determined pressure from BlackRock’s prolific and influential CEO Larry Fink and political headwinds from a new ESG-friendly U.S. government, voluntary disclosure is headed for some purposeful shifts.
Let's begin with reporting’s new, most importance audience: Investors.
As demands for ESG risks and impact get louder, companies are starting to pivot to an investor-first approach to reporting. Consider media giant Verizon, which last year completely overhauled its report to lead with audited data (quantitative and qualitative) across its ESG programs. For the first time, Verizon also led its report with its governance efforts, signaling an important shift in priorities and acknowledging investors’ demand for information about its board diversity, risk management policies, ESG oversight and other matters.
2021 is poised to bring fundamental changes to the primary audience that voluntary ESG reporting serves and what it should embody.
An inherent part of reaching this audience is effectively meeting the criteria of the various ESG ratings agencies — more than 600 organizations and growing — that investors use to evaluate and compare companies. This often means catering to bots and artificial intelligence functions that are usually the first to scan reports and websites for ESG data in order to spit out scorecards and investment analyses.
For many companies, disclosure strategy has morphed to a kitchen-sink approach: putting every possible sought-after piece of content and data between the report’s front and back covers. The result: A single source of truth but an overwhelming, unwieldy document whose purpose often is poorly understood by internal audiences. Corporate reporters seem caught in a tug of war between satisfying the disclosure needs of the capital markets and defending the encyclopedic length of the publication to internal marketing departments.
Even CEOs who fondly think of the report as a credible platform to tell their story of impact, balk at the sheer length of the report under this approach. Hence, an identity crisis.
So, how are effective reporters starting to solve this? I see three primary trends:
First, there’s the need to make data useful and usable.
While the demand for useful ESG data has been the subject of some debate given its voluntary nature, the conversation is decisively starting to shift toward material disclosure guided by a core set of frameworks, most commonly CDP, SASB and TCFD. For companies such as Micron, which has steadily evolved its reporting over the years, this battle is slowly drawing to a conclusion as investors become savvier in understanding the relationship between financial and non-financial ESG risks, and companies become more proactive in communicating them.
"If an issue is important to investors, they should highlight it, ask questions and engage in ongoing dialogue," Marshall Chase, Micron’s director of sustainability, explained to me via email. "Micron began providing sustainability reports over five years ago, and we now include ESG information in our earnings calls to highlight important areas. We see a growing number of investors using this information and contacting us to discuss their priority topics — most frequently climate change and diversity, equality and inclusion."
Let’s tackle usefulness: For investors, it starts with accessible data. Very tactically, that means being able to see comparable data through graphic visualizations and tables. For those looking to tell a more qualitative story, supplemental infographics and interactive visuals must do the job.
This focus on usability has been at the forefront of General Motors’ approach to ESG reporting. Its 2019 sustainability report, for example, features a menu of links to a comprehensive data resource and all reporting frameworks from every page of its digital report. The automotive giant, which just last week announced its industry-leading decision to pursue an all-electric future and sell only zero-emissions vehicles by 2035, takes a decidedly comprehensive approach to its report, serving as a single source of public disclosure to support a myriad of ESG ratings and rankings.
Or consider Waste Management and MetLife, both of which debuted new digital ESG resource hubs in their latest reporting cycles to solve for searchability, ease of access and demonstration of comparable year-over-year data. Expect this approach to continue as both companies evolve the robustness and comparability of their data.
Second, let’s look at how the types of data and disclosure is shifting.
In 2020, fashion company PVH, whose brands include Tommy Hilfiger and Calvin Klein, dedicated over half of its 2019 corporate responsibility report to performance data, spanning a host of ESG indicators. It also included for the first time data on issues such as "employee diversity by store and warehouse level," "employee turnover data" and "living wages at the factory level" — an acknowledgment of the increasing demands by investors for better insights into human capital management, global operations, risks and mitigation efforts.
To help investors see how companies are connecting intent, action and performance, some reporters have started providing benchmarks against their data, in turn helping elevate its relevance. For example, MetLife, in its 2019 sustainability report, disclosed its diversity (gender and ethnicity) data against key industry benchmarks by Deloitte and McKinsey. Providing this comparative lens allowed MetLife to demonstrate how it was measuring progress against others and how it is using data analytics to define its efforts — helpful to investors in their matchmaking between value and price.
Finally, let’s look at how a content strategy is helping reports better engage diverse audiences.
As reports pivot to become investor-first documents, companies will be well-served to balance them with engaging storytelling — with the operating word being "engaging." Effective reporters should approach their report almost as a content suite, a collection of elements that can satisfy the many audiences of the modern ESG report. That requires treating each stakeholder set as a unique audience group and respecting their distinctly different demands from companies.
For investors, ESG data centers make data easy to access and useful; for employees, digital storytelling comes in play; and for consumers, social media, advertising and product labeling can become more effective vehicles to showcase transparency and enable behavior change.
Investors should expect ESG reports to deliver data in a more meaningful way, including more widespread use of the TCFD and SASB frameworks to guide the disclosure. Raters and rankers should expect to find this year’s reports easier to access and searchable for their bots. And some companies should begin seeing the results of adopting a content strategy that prioritizes content delivery according to audience needs.
This story was originally published by GreenBiz and can be accessed here.