Among the directors who say their companies are already reporting on ESG externally, 58 percent say their companies provide a stand-alone ESG/ sustainability report, with others relying on the annual report, company website or proxy statement to make ESG disclosures. Twenty-eight percent of directors say their companies are incorporating ESG communications into earnings calls.
While different company communications will target different audiences and have different objectives, all communications should articulate a clear, consistent, long-term strategy for value creation. ESG disclosures should tie into the narrative coming from the rest of the company’s external reporting. Companies may ask themselves, for example, how the risk factors in the 10-K align with the ESG risks discussed in the sustainability report, or how the sustainability report aligns with what companies are highlighting on earnings calls. The board can play an important role in overseeing the consistency and clarity of the company’s ESG narrative.
Disclosures should align to investor expectations and needs, and what investors have stressed most is that they want ESG disclosures to focus on what is material and align to external frameworks. They seek a baseline level of standardized data to support relevance, objectivity and comparability. Nearly all the investors contacted by EY researchers in a recent investor outreach cited the Sustainability Accounting Standards Board (SASB) as a decision-useful framework. Notably, SASB’s standards are geared to help companies disclose sustainability information based on their sector that is financially material.
However, the 2021 research indicates that company-specific metrics are the most popular disclosure approach across our survey group. Notably, 19 percent of the directors participating in the study say they aren’t sure what frameworks or metrics are used.
Another critical consideration for ESG reporting is that companies need to have robust disclosure processes and controls in place, including those related to data quality. Sustainability reports are often created by a different part of the organization from where financial reporting is done, so the controls and discipline might not be of the same rigor and the sustainability report may not receive the same level of attention. Involving internal audit and obtaining internal and external assurance will help the company provide credible, quality ESG data to the marketplace and build stakeholder confidence in the reliability of this information.
Among the surveyed directors who say their companies are already reporting on ESG, 35 percent note that their companies currently have controls in place around the collection and disclosure of material ESG information, and 21 percent say the company is obtaining external assurance over its ESG reporting. Notably, 74 percent of these same directors say their companies are integrating ESG information into regulatory filings.
With stakeholders increasingly relying on ESG data to make informed decisions, it is paramount that companies develop robust governance policies regarding this information. Our survey shows that a majority of companies that are reporting on ESG are in the process of developing such policies. Boards, and particularly audit committees, can play a crucial role here through their oversight.
ESG in the future
It would be difficult to overstate the level of stakeholder interest in company ESG practices and performance. The topic has largely dominated much of the discourse around corporate governance in the past year, with near-continuous market-driven and regulatory developments accelerating the pace of change and shaping stakeholder expectations. This context has created a steep learning curve for directors, executives, investors and other stakeholders who are navigating this new landscape. The survey results reflect opportunities for boards to continue to deepen their knowledge and enhance their oversight of ESG to help guide their companies through these dynamic, disruptive times.
ESG questions for boards to consider
- How is the company’s strategy and risk management meeting the needs of key stakeholders, addressing financially material environmental and social factors, and driving competitive advantage?
- How is the board learning about ESG-related trends and developments that could impact the business and affect shareholder support for the board and management?
- How would a sustainability materiality assessment help inform the company’s strategy and strengthen relationships with key stakeholders?
- Would assigning ESG oversight responsibilities to board committees enhance the board’s governance?
- How do company communications increase the brand value of ESG initiatives and meet investor needs for decision-useful ESG information?
- Is the company taking the same approach to nonfinancial data as it is to financial data in terms of disclosure processes, controls and obtaining external assurance?