10 minute read 21 Dec 2021
Businesspeople meeting at office

A year in review: the evolution of ESG for investors, boards and the finance function

Authors
Marc Siegel

EY Americas Corporate and ESG Reporting Leader, Financial Accounting Advisory Services

Helping clients deliver long-term value creation story. Passionate about corporate reporting.

Holly Menna

Manager, FAAS, Assurance, Ernst & Young LLP

Higher education mentor. Community advocate. Passionate about helping clients transform through ESG reporting.

10 minute read 21 Dec 2021
Related topics Assurance

The 2021 calendar year has been an inflection point in environmental, social and governance (ESG) matters.

In brief

  • The 2021 calendar year has been an inflection point in environmental, social and governance (ESG) matters, a topic that not so long ago was relegated to a narrow set of stakeholders but emerged this year into the mainstream.
  • There was an increase in investors’ increasing requests for, and interest in, ESG matters.
  • The role of the board of directors evolved with regards to ESG.
  • The role of the finance function in ESG also grew.

Investors requests for, and interest in ESG matters

Results are in from our 2021 global institutional investor survey of more than 300 decision makers at buyside institutions.  Three themes which rose to the top of the responses included:

  1. While the global pandemic has been a powerful ESG catalyst, both companies and investors have more to do in order to assess ESG risk effectively and meet the increasing stakeholder emphasis on social issues. Eighty-six percent (86%) of investors surveyed said that a company having a strong ESG program and performance would have a significant and direct impact on analyst recommendations today.
  2. There is a growing focus on the transition to a net zero carbon economy, and climate change is increasingly central to investment decision making. Roughly eighty percent (80%) of investors surveyed said that over the next two years they will devote considerable time and attention to evaluating transition risk implications when they make asset allocation and selection decisions.  However, only a minority of them have a highly mature approach to assessing a company’s climate risk performance.
  3. Better quality nonfinancial disclosures and a clearer regulatory landscape are likely to be important to realizing the potential of ESG performance. Roughly ninety percent (90%) of investors surveyed would like to see consistent reporting of ESG performance measures become mandatory.

On our September 2021 webcast on investor perspectives, four investor representatives discussed how they use ESG information in their investment and voting decisions.  Some of the important points these investors made include:

  • An observation that ESG mentions in earnings calls are increasing and a suggestion that companies integrate ESG into overall corporate strategy and describe their ESG progress on earnings calls, as it is an important part of long-term strategic goals
  • Using a standard presentation framework and format, such as one established by the Sustainability Accounting Standards Board (“SASB”) or the Task Force on Climate-Related Financial Disclosures (“TCFD”), allows companies to collect sufficient information in a format investors want to see, while still allowing them to tell their own unique ESG story
  • Many investors are not relying exclusively or predominantly on third-party ratings or rankings providers. Instead, they leverage these platforms for the research they provide and supplement that with additional data
  • While there are pervasive ESG issues that affect all companies, many investors consider ESG issues with a sector-specific lens

The proxy season during 2021 provided some additional insights into the interests of investors and how they are evolving in their use of ESG information.  As shown in EY’s 2021 proxy season review, for meetings through June 30, twenty percent (20%) of ESG shareholder proposals that went to a vote received more than 50% support.  That’s is up from twelve percent (12%) in 2020.  It is also worth noting that at 50% support, many investors consider voting against incumbent directors the following year if the company is deemed to have taken insufficient action to address the proposal. Some of the topics most often cited in the shareholder proposals include diversity, equity and inclusion, climate, and political/lobbying spending.

Role of the Board of Directors in ESG

The EY Center for Board Matters also stated key takeaways and questions for board members to consider based on the findings from the 2021 proxy season review. The below are a sample of the action items boards can do:

  • Ask how shareholder engagement is helping the company understand investor expectations and interpret and respond to voting results
  • Review how the company’s response to shareholder proposal submissions aligns with its ESG ambitions
  • Assess whether the proxy statement and the board’s governing documents make clear how the board is overseeing ESG matters
  • Communicate both the board’s current demographics and the steps it is taking to advance diversity in the boardroom.  
  • Consider how corporate reporting in the proxy statement and other channels addresses investor requests for enhanced ESG disclosures and commitments.
  • Ask how the company is seizing the opportunity to prepare for future ESG disclosure requirements, including putting robust processes and controls in place with a supporting audit trail.
  • Confirm that the board is getting the information it needs to understand the private market and regulatory initiatives related to ESG.

On our June 2021 webcast on the role of finance and the board in corporate reporting, we discussed with a board member on the panel about governance trends. Some of the key takeaways included:

  • Boards are increasingly focused on which ESG factors are material to the company and how management is reflecting them in strategic planning and risk management. Key ESG issues are being considered by investors, customers and employees in deciding whether and how to engage with a company, which makes it a strategic issue relating to long-term value creation and sustainability.
  • Depending on the ESG issues that are most important to a particular company, management and the board are likely to organize governance structures accordingly. Finance professionals should recognize that boards and audit committees are increasingly interested in ESG reporting and are beginning to look to finance to help develop high-quality reporting to investors.
  • As others are making decisions or creating ratings based on all available information, it’s important for companies to take the opportunity to tell their ESG story or risk having others do so.

Additionally, a webcast on what boards need to know about ESG discussed the board’s evolving role in ESG.  Boards should partner with management to deepen their understanding of the fast-evolving significance of ESG to the company’s stakeholders and adapt their value proposition while acting to meet growing demands for ESG information, governance and performance.

Role of the finance function in ESG

On our June 2021 webcast on the role of finance and the board in corporate reporting, one panelist was an audit committee chair and another was a corporate controller.  Some excellent insights were provided about the role of the finance function. For example, some of the key takeaways included:

  • Finance professionals should recognize that boards and audit committees are increasingly interested in ESG reporting and, in particular, beginning to look to finance to help develop high-quality reporting to investors.
  • The role of the finance function with respect to ESG is still evolving, and some companies are increasing their investment in resources to help enhance the quality of the information rolling into ESG reports. ESG reporting is a shared responsibility, with finance playing a role in processing, controlling and reviewing the data included in sustainability reports.
  • Many companies today report on ESG using different systems from those of financial reporting, with fewer internal controls in place. Some even report ESG information with a significant time lag as compared with the annual financial report. There is not yet a high degree of readiness to report ESG data in the same time frame as financial information nor with the same level of rigor. Finance professionals should prepare now for potential new standards that could be required.

The results from the 2021 EY Global Corporate Reporting Survey are in and it noted that businesses around the world are strengthening their support for globally consistent and enforced standards on environmental reporting, but many still have some way to go to improve their own efforts. Some of the key findings include:

  • Seventy-four percent (74%) of finance leaders surveyed said the transition from traditional financial reporting to an enhanced reporting model that encompasses financial and ESG reporting has accelerated.
  • While seventy-four percent (74%) of finance leaders surveyed said it would be helpful to mandate reporting of ESG performance measures against a set of globally consistent standards, this rises to eighty-nine percent (89%) for investors.
  • In the 2020 survey, sixty-three percent (63%) of finance leaders surveyed said that ESG reporting was a “significant” or “very significant” part of their roles and responsibilities.  Today, this has increased to seventy percent (70%) of respondents.

In our December 2021 webcast – building out the finance function role in ESG reporting – we highlight what we are seeing in terms of leading practices around processes, controls, systems and governance around ESG data, as well as which ESG metrics are most commonly assured, and how companies ultimately determined the best approaches to take in the current reporting year.

With additional contributions from Holly Menna, ESG & Corporate Reporting | Financial Accounting Advisory Services.

Summary

In 2021, the importance of ESG issues has evolved for investors, boards, and finance function professionals as pressure from stakeholders expanded. Fueled by the COVID-19 pandemic, investors have attached even greater importance to a company’s ESG performance when it comes to investment decisions. Boards are also increasingly focused on determining which ESG issues are most material to their company and how these issues can be addressed from a management and risk perspective. At the same time, the role of the finance function is continuing to grow, with finance playing a larger role in managing the data collected for sustainability reports.

About this article

Authors
Marc Siegel

EY Americas Corporate and ESG Reporting Leader, Financial Accounting Advisory Services

Helping clients deliver long-term value creation story. Passionate about corporate reporting.

Holly Menna

Manager, FAAS, Assurance, Ernst & Young LLP

Higher education mentor. Community advocate. Passionate about helping clients transform through ESG reporting.

Related topics Assurance