Six Steps to Improve your ESG Performance
In the future, climate and ESG considerations will likely be at the heart of mainstream investing. Investors will tailor their investments and fulfil their fiduciary duties through better quality and more widely available data on sustainability and performance, and more informed judgements of strategic resilience.Mark Carney Former Governor of The Bank of England
It is widely recognised that environmental, social and governance (ESG) topics are financially material and in response, a growing proportion of investors are incorporating ESG considerations into their investment decisions. Indeed, according to Morningstar assets under management in funds abiding by ESG principles have now surpassed $1 trillion for the first time, with 91% of investors agreeing that non-financial performance is critical to decision making.
It is increasingly clear that investor interest in ESG-related topics is here to stay. And credible, investor facing information on your company’s management of ESG risks and opportunities has never been more important.
Based on our experience, here we provide 6 practical steps which will enable you to improve your ESG performance.
1. Integrate ESG into your business strategy
Investors want to know how companies are responding to macroeconomic trends, how they identify ESG risks and opportunities, and how they are positioning themselves for long-term success. Despite this, only 3 in 10 of Europe’s largest listed companies fully disclose the environmental and climate-related impacts of their business model.
Companies leading in this area will have paid significant attention to how ESG factors might impact their business and embedded these into their strategy. Meanwhile, laggards tend to view ESG issues as belonging solely in a corporate responsibility or sustainability report.
2. Identify your material topics
Companies today must track and understand an ever-increasing range of ESG issues. The breadth of stakeholders and variety of ESG topics means that organisations cannot address every single issue equally. Instead, you need to focus your strategy and disclosure around the ESG topics which are most material to your business and sector. Investors, and indeed all stakeholder, value relevance.
If you are new to materiality or are conducting an assessment for the first time, do refer to our how-to-guide on materiality where we offer practical tips on how to carry out a materiality assessment.
3. Understand your ESG ratings
Both private and institutional investors regularly look at ESG ratings to inform their decision making. Indeed, recent research shows that that 65% of institutional investors look at ESG ratings at least once a week, and companies with high ESG ratings receive 15% more investment and 10% reduction in costs of capital.
With this in mind, it is essential to improve your ESG ratings performance year-on-year. We recommend developing an ESG ratings strategy and engaging with ratings agencies (and specifically their reports) to delve into the granular E, S and G scores to identify gaps and opportunities. This will allow you to focus on improving and better communicating the information which matters most to your investors.
4. Align to global & regulatory frameworks
Between 2000 and 2019 there was a 92% increase in mandatory and voluntary ESG disclosure frameworks. We are still some way from a global consensus on reporting standards, however the frameworks most widely cited by investors are illustrated below.
The use of global standards and frameworks has a key role to play in making more consistent, comparable and reliable information available to investors. Many organisations find that following a recognised framework will guide them in developing a more strategic approach to ESG, whilst also helping to shape the narrative in a format that investors and other stakeholders will appreciate.
5. Strive for ‘investment grade’ data
Investors want ESG information to be accurate, consistent, clear and comparable. The London Stock Exchange has identified 7 characteristics of ‘investment grade’ data which all companies should strive for when compiling ESG data. These are:
- Accuracy: deploy rigorous data collection systems
- Boundaries: align to the fiscal year and business ownership model
- Comparability and consistency: use consistent global standards to facilitate comparability
- Data provision: provide raw as well as normalised data
- Timeliness: provide data to coincide with annual reporting cycle
- External assurance: consider having the data assured
- Balance: provide an objective view, including both favourable and unfavourable information
6. Consider your communication channel
Whether you decide to include ESG information in your annual report, an integrated report or a stand-alone sustainability report, the choice of reporting formats will inevitably involve trade-offs between breadth and depth. However, these options are not mutually exclusive, and you may choose to pursue a collection of complementary reporting channels. And remember, reporting should be one part of the wider dialogue you have with investors.
For more practical guidance and advice on how to improve your ESG performance, please take a look at our ‘How-to Guide’ on Improving your ESG performance.