6 minute read 2 Feb 2021
Aerial view of a young eucalyptus plantation

Six ways companies can enhance their ESG reporting

By Jamie Smith

EY Americas Center for Board Matters Investor Outreach and Corporate Governance Specialist

Trusted resource on corporate governance and institutional investor trends. Researcher and analyst. Lifelong learner. Mother and nature enthusiast.

Contributors
6 minute read 2 Feb 2021

Quality ESG disclosures matter more than ever.

In brief:

  • Investors want ESG reporting to focus on what is material and align to external frameworks.
  • Workforce diversity in terms of gender, race and ethnicity tops the list of human capital disclosures investors want most.
  • Investors seek more quantitative data around ESG metrics, performance and goals.

When it comes to assessing a company's ESG practices and performance, investors said that company disclosures — along with direct engagement conversations and the investors’ own subject-matter expertise and research — are their most valuable resources. Most investors told us they use third-party ESG ratings (if at all) as initial, scalable screening tools or guideposts that may give them an indication of where to focus deeper research and analysis.

Investors are working to improve the ESG data set on which they rely by asking companies to enhance their ESG reporting. When we asked investors what key enhancements they want companies to make, most of their answers aligned to one or more of the following six tips.

1. Focus on what is material and the connection to strategy

Investors want reporting to focus on the ESG topics that intersect most directly with the business and tie directly to strategy. Some investors noted that it is particularly valuable when company reporting discusses the results of a formal materiality assessment, providing deeper context around how the company defined priorities. While investors generally said that financial value should define ESG topics of focus, some urged companies to also consider areas that may be material to stakeholders from an impact perspective and pointed to values-aligned investing and consumer behavior as growth areas.

2. Align disclosures to external frameworks

Investors want companies to align their disclosures to an external framework, and many encouraged companies to provide a report card or appendix map to make that alignment explicit. Nearly all cited the Sustainability Accounting Standards Board (SASB) as a decision-useful framework. Investors seek a baseline level of standardized data to support relevance, objectivity and comparability.

ESG practice and performance

3. Disclose metrics, performance and goals

Investors also focused on the need for more quantitative data. They want disclosure of the metrics management is providing to the board to measure progress and year-over-year performance against ESG goals. Investors said that without the data, they cannot assess the company’s progress on ESG initiatives and may not have the context needed to understand certain goals (i.e., baseline data is necessary for understanding what a percentage increase or decrease goal means). Some investors noted that they increasingly see forward-looking climate goals and want to see the same for workforce and human rights topics.

4. Consider integrating material ESG disclosures alongside traditional financial metrics

While some investors made clear that they don't have a strong view on where the disclosures are made, some believe that integrating material ESG disclosures into regulatory filings, particularly the 10-K, is the ideal approach and best reflects how ESG is aligned to the core business model and integrated into the business. These investors acknowledged that ESG reporting is a journey and view the integration of sustainability factors into financial reporting as the ultimate endgame.

5. Enhance data credibility through assurance

Some investors said that attestation would help validate sustainability reports and generally characterized assured ESG data as the gold standard for demonstrating high-quality information.

6. Make sure company disclosures are picked up by third-party data aggregators

Some large asset managers rely on third-party data providers to aggregate and structure company disclosures in a way that is more scalable and efficient to their processes, allowing raw ESG data across thousands of companies to be uploaded into their internal platforms for assessment. While investors generally acknowledged limitations of third-party data (e.g., gaps, data quality issues) they stressed their need to have data at scale. To make these processes successful, investors encouraged companies to take a more proactive role in confirming that their data is being picked up correctly by leading third-party providers.

  • Which human capital disclosures do investors want most?

    We asked investors which workforce disclosure topics would be of greatest value to them as they assess human capital management, and as new human capital disclosure requirements take effect. By far, workforce diversity across gender, race and ethnicity was the top choice, with 85% of investors saying they want increased disclosure in this area. This finding aligns with diversity being a top investor engagement priority and an area many investors view as a top strategic value driver.

    Coming in second was pay equity, which investors generally discussed as an extension of workforce diversity disclosures and a window into whether the company has structural issues around diversity, equity and inclusion (DEI) that need to be addressed. Many of these investors specified that they want companies to disclose median pay gap data, which shows how women and minorities across the organization are paid on average regardless of role. They said that this information can signal whether diverse talent is stagnating at less-senior, lower-paying roles, and some said they want to see this unadjusted pay gap for each defined level of the company’s workforce.

    Discussions around workforce stability, the third-most-chosen topic, focused on how turnover data can provide insights into whether companies are building on the investments they’ re putting into onboarding and training, and whether the company is an employer of choice in its industry. Some investors said they would ideally like to see workforce stability data disaggregated by gender, race and ethnicity (to enhance their view into DEI challenges) and/or by job level (to better understand the level of turnover happening at more-senior levels). A few investors said they explore alternative data sources to get insights into turnover rates when company data is not available.

    Other key themes from these discussions included investor interest in understanding the nature of a company’ s relationships to independent contractors and their role in the company’ s business model (e.g., are independent contractors being valued relative to their role in the business) and seeing how companies are developing, upskilling and rebalancing employee skill sets to adapt their workforce to changes in the company’ s strategy. Investors also highlighted that data should align to external frameworks and be put into the context of the company’ s strategy, expectations and goals.

    Greatest value to you as you assess human capital management

Key board takeaways

  • Challenge whether the company’ s ESG disclosures communicate how the company is competitively differentiating itself to create value over the long-term.
  • Consider whether the company is providing the comparable ESG data investors seek and confirm that those disclosures are being picked up by leading third-party data and ratings providers.
  • Consider whether obtaining external assurance and integrating material ESG metrics into regulatory filings could strengthen the company’ s positioning.
  • Given that social topics came to the fore in 2020, ask management about opportunities to enhance disclosures on social topics such as diversity and equity in the workplace, other strategic workforce issues and human rights.

Summary

Investors want ESG reporting to focus on topics that are material to the business and clearly connected to strategy. They want companies to align disclosures with external frameworks and will be paying attention to how disclosures reflect progress and year-over-year performance against stated goals.

About this article

By Jamie Smith

EY Americas Center for Board Matters Investor Outreach and Corporate Governance Specialist

Trusted resource on corporate governance and institutional investor trends. Researcher and analyst. Lifelong learner. Mother and nature enthusiast.

Contributors