With well over a dozen accepted frameworks to report ESG information, such as the United Nations Sustainable Development Goals, the Global Reporting Initiative (GRI) Framework and Sustainable Accounting Standards Board (SASB) standards, it’s difficult to determine the best route to disclosure.
Investors tell us they struggle to make use of the multitude of data currently published under the current disclosure frameworks, and that the qualitative information is often generic or incomplete with respect to dealing with investors’ perception of risk. Many investors rely to some degree on third-party ESG rating agencies, such as the Dow Jones Sustainability Index, but there’s no standardized methodology for conducting ESG ratings. For this reason, most investors use rating data to supplement their own analysis of the investment risk created by the effect of ESG factors on the company and how well management is responding.
Against this backdrop, in November 2018 another investor-led initiative, known as the Embankment Project for Inclusive Capitalism, published a report compiled by leading investor and corporate participants that set out a direction for how companies could better report measures that help focus on long-term value.
The project participants formed a strong consensus that risk and performance in six factors were most important to focus on. Three of the six factors were environmental, social and governance; the other three were talent, innovation and consumer trends. While the report provides helpful thinking, it doesn’t offer the magic bullet of measures to report, since these will vary by industry and company.
One key takeaway from the report is that companies need to explain how they assess and manage risk for these six factors in a clear manner that’s transparent with respect to the nature of the risks, potential impacts, management’s objectives and success measures.
In the current year, issuers also need to address the recommendations of the International Task Force for Climate-Related Disclosure. These recommendations are focused only on climate change-related risks, but also ask users to make disclosures around the themes of governance, strategy, risk management processes, and metrics and targets.
We strongly encourage companies to consider whether they can adopt or better align their ESG governance with the principles-based COSO risk management framework. This represents a well-respected common roadmap that should give the board and investors comfort. Not only does it provide a strong approach to managing risk, but letting investors know you’re using it could give them confidence that’s hard to build through existing ESG disclosures.