ESG: THE RULES FOR DISCLOSURE

ESG: THE RULES FOR DISCLOSURE

Over the last few years we’ve seen an increasing focus from investors on Environmental, Social and Governance (ESG) issues, and there’s no sign of it slowing down.

In fact, it’s not only investors that are expecting companies to have a position on ESG issues – other stakeholders  are demanding it too.  For this reason, ESG measurement, reporting and disclosure is front and centre for many listed corporates.

Last week, we attended the Australasian Investor Relations Association (AIRA) annual ESG Session, where we heard from superfunds, proxy advisers and investor relations teams on recent trends in this area, including what investors are seeking from companies and how corporates are implementing ESG measures in their businesses.

  1. IT’S ALL ABOUT DRIVING VALUE

ESG is a core component to driving long-term shareholder value, so the process should be tailored depending on what the key value drivers are. Instead of trying to cover everything, companies should be asking what is most important to the business and identifying the most critical ESG issues for their business and how these link to key value drivers of the company. Companies need to then be able to clearly communicate to investors how these issues are being managed to maximise long term value.

  1. PUTTING THE G IN ESG

Companies need to have a firmer grip on the governance of ESG. Governance provides the umbrella under which everything else is managed, so, a well governed company will be able to manage those critical ESG issues. The starting point for good governance is Board effectiveness. Having the right Board in place is the best strategy a company can have to identify ESG issues and give investors’ confidence that they are being managed. One way Boards can communicate their effectiveness is through the Board skills matrix in the Annual Report and providing context to the skills outlined, with relevance to the company’s strategy.

Some investors are also calling for director and management salaries to be measured against progress on ESG matters – where performance is centered around value mechanisms and measured on appropriate metrics.

  1. GO BEYOND TARGETS

Setting clear targets is important, but companies need to take it one step further. Investors expect more than simply just stating a target, they want to see how you are going to get there. Consider a roadmap which includes the timing, various projects involved, how they will be executed, the capital allocation needed, and importantly, how it will create value. And be honest if you get underway and find the targets need to be extended.

  1. ENGAGE AND SEEK FEEDBACK

Engaging with shareholders on ESG matters should be an ongoing exercise and incorporated into a year-round investor relations strategy. Companies should maximise opportunities for feedback to ensure they are reporting and spending effort on the right areas.

Consider holding ESG specific briefings or ‘roadshows’, which would involve the Board, representation from the Chair and senior management. Or, for smaller companies, make sure you incorporate ESG meaningfully into results presentations and investor days. Boards should listen to shareholders and act in accordance with their views of what the best interests of the broader shareholders.