In part two of our series on Environmental, Social, and Governance (ESG), we will explore ways to jump-start your company’s entrance into this new level of disclosure. There has been a lot of insightful information published on this topic, but many public companies are still left wondering the best, most comprehensive way to publicly disclose their applicable policies in order to address the growing number of investor questions on the topic, as well as improve their relative rating agency scores over time.
First, don’t worry…almost all public issuers are in relatively the same boat – a growing awareness of the importance of identifying ESG initiatives and getting the information on those efforts and goals into the public domain. Similarly, investors and investment banks are in the process of identifying what metrics are important to their investment decisions and how that applies across a wide spectrum of industries (e.g., should the same metrics apply to a financial institution as a manufacturing company?). They also have to consider how it applies to varying corporate life cycle stages (e.g., should the same metrics apply to a newly public, growth stage company that would apply to a mega-cap issuer with thousands of employees?) and what considerations need to be adjusted for corporate domicile (e.g., a company with only one domestic office versus a multi-national footprint with a global employee base).
Keep reading to see the four steps we recommend companies follow for the smoothest transition into getting involved with ESG.
Step 1: Review the ESG framework.
It’s important to understand why ESG seems to have exploded onto the disclosure scene over the past few years. While it seems new to many US-based public company management teams, the topic of ESG has been in the global domain for more than a decade but crept into the limelight largely due to the emergence of several global platforms that highlight important criteria for driving true corporate responsibility. Reviewing these frameworks can provide valuable insight and ideas for determining where your company has already been successful and where you may fall short.
Below is a list of these frameworks.
The United Nations 2030 Agenda for Sustainable Development, adopted by all UN Member States in 2015, provides a shared blueprint for peace and prosperity for people and the planet, now and into the future. The UN has identified 17 Sustainable Development Goals (SDG), of which participating companies are required to submit annual “Communication of Progress” reports to the UN. Many of the UN issues involved are related to the environment, including global warming, carbon emissions, and water and natural resource use and conservation. But there are many just as relevant issues from labor to diversity to equality to disclosure that are included. How companies address and embrace the 17 goals is entirely up to them.
The Task Force on Climate-Related Financial Disclosures (TCFD) is an organization that was established in December of 2015 with the goal of developing a set of voluntary climate-related financial risk disclosures that can be adopted by companies so that those companies can inform investors and other members of the public about the risks they face related to climate change. The organization was formed by the Financial Stability Board (FSB) as a means of coordinating disclosures among companies impacted by climate change.
The Sustainability Accounting Standards Board (SASB) is a nonprofit organization that sets financial reporting standards. SASB was founded in 2011 to develop and disseminate sustainability accounting standards. While the Financial Accounting Standards Board (FASB) has developed the accounting principles currently used in the financial statements in the United States for the past 40 years, other social and environmental measures are now understood to be relevant. The SASB aims to establish industry-specific disclosure standards across environmental, social, and governance topics that facilitate communication between companies and investors about financial material. This information helps influence decision making.
Step 2: Identify your “ESG” team.
There are a number of people within your organization who can serve as key contributors to your ESG team. Investor relations should have a seat at the table but consider a broader base of your leadership group to form the core of your ESG team. It’s likely you’ll want to include someone from your internal legal team, human resources, and finance as part of the committee. But consider casting a wider net to include sales and marketing, public relations, manufacturing and procurement, community relations, and risk management. People from these organizations can bring new perspectives and invaluable insight into ways that your organization can make meaningful improvements in driving ESG goals.
Step 3: Identify public disclosure source documents.
There are many options for getting your ESG messaging into the public domain – there’s no right or wrong path. The nice thing about ESG disclosure is that it is not tied to earnings or an SEC filing timeline. A company can disclose its information at any time and in any format, though updating the IR website, within a governance or corporate responsibility section, seems to be the most common vehicle today.
A simple option that will give your organization a starting point and the most flexibility to update as you progress is a letter from your CEO or Chairman, which can accompany the Proxy Statement, appear in the Annual Report to Shareholders, or be posted on your corporate website. This letter can cover a general overview of your company’s commitment to ESG and highlight areas that you are pursuing that hold specific importance to your sector, market, and employee base. Other options are factsheets or simple digital brochures that highlight how your company is addressing some of the key topics addressed by SASB, the UN’s SDGs, and TCFD. Some of this content can also be found in Board documents and HR materials that can be brought into the public domain.
We’d recommend avoiding disclosures in public filings such as 10Ks and 8Ks, because they carry more stringent legal requirements. At this stage, the priority is to let the investment community know you are working on ESG goals, demonstrate that your company is “forward thinking and aware,” and then remain flexible in your ability to update public information as you make progress throughout the year.
Step 4: Remember that ESG and the goals are completely company defined.
The most important consideration as a public issuer is to identify what’s right for your organization and start with those disclosures. There is no standard for ESG; rather, companies should have and disclose policies that reflect the relevant key topics and how they are being addressed or pursued for future implementation. Think of ESG as an aura around your company’s culture; the ESG related information is the result of how companies execute business.
If your company is ready to make the first step toward getting started with ESG, we’d love to help. Contact our team today.
Leigh Salvo, Managing Director