While there are certain frameworks no one-size-fits-all method or framework can produce reporting that meets the needs of all investors for all purposes, but there are emerging international and local best practices, guidelines and frameworks.

Similarly, despite having different needs, there is a growing level of consistency in incorporating material ESG factors into investment decision making. Building on existing resources and practices, this section summarises existing views on corporate reporting of ESG information to investors.

The aim in this section is to identify areas of broad consensus that can provide a clearer message to the corporate community, stock exchanges and regulators, to enable these actors to providing markets with more consistent and comparable ESG information.

What follows below is a discussion of key elements of corporate ESG reporting where our investor working group identified a generally common position on a range of issues.

Key elements – Key Elements for Corporate ESG-reporting

Terminology

Some companies use the terminology Corporate Social Responsibility (CSR), but in this section the broader terms ‘sustainability’ or ‘ESG’ are useds. Although the term ‘non-financial’ is widely used, it can imply misleadingly that ESG factors are financially immaterial.

Although companies can also report information for a broader stakeholder audience, investors are primarily concerned with ESG information that is material for their investment decisions.

The concept of materiality always includes financial materiality, but both companies and investors may have broader interpretations that reflect a values-driven or impact investing orientation.

For this reason, the terminology aligned to the concept of stocks of value (or capitals) is used when talking about reporting, or ‘sustainability factors’.

Purpose of reporting

Reporting should adequately inform the management of the company, its shareholders and its stakeholders. It should help these users to make informed decisions. This includes confirmation of a company’s internal commitments to achieve its ESG goals.

Company mission, statement of purpose, strategy

A company should communicate its mission (or ‘statement of purpose’), which explains the company’s main objectives and articulates a clear corporate strategy. Mission, statement of purpose and strategy should be based with full consideration given to the company’s environmental or social performance. It can include articulating the role that the company wants to play in society.

Board responsibility

Management of strategic ESG risks and opportunities is the responsibility of executive management under the oversight of corporate boards. While different corporate departments (such as finance, investor relations, communications, legal, sustainability and individual business units) can all make valuable contributions to the outcome of a report, ultimate oversight sits with the Board.

By embedding knowledge of sustainability factors into their core duties, directors can position themselves to facilitate the mainstreaming of ESG factors into business strategy, organisation culture and operational practices in a way that supports the long-term profitability and viability of the company.

Evidence also suggests that companies with strong systems for board sustainability oversight are more likely to perform better on sustainability challenges such as climate change, water scarcity, pollution, and human rights abuses.

Boards may find it beneficial to issue a statement that clarifies how the board determines: Key Elements for Corporate ESG-reporting

The importance of different stakeholders and ESG factors;
Which stakeholders/ESG factors were selected as material and why; and
What time frame they had in mind making these judgments as they change over time.

Developing such a statement is also an opportunity for the board to reflect on the company’s role in society and contribution to sustainable development.

It can provide transparency regarding the board’s position on and oversight of the company’s ESG risks and opportunities, and strengthen the company’s credibility when communicating on ESG factors. A statement of this nature will depend on the materiality for the intended readers of reports.

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Board commitment to reporting on ESG factors provides credibility for company reporting on sustainability commitments and performance. It indicates that risks and opportunities are dealt with at the highest level.

Many investors examine not only ESG performance and the quality of disclosures, but also the governance or management of these issues by the board and executive teams.

Non-Executive Directors and oversight

ESG policies, activities and reporting are key board responsibilities, though specific requirements may differ between jurisdictions. In some jurisdictions, this is also reflected in national corporate governance codes.

For example, the Dutch Governance code explicitly mentions the ESG responsibilities of the non-executive board, who address these issues in their own annual report. Investors agree that non-executive directors have a role to play in ESG oversight the board’s activities in this area should be included in company reporting.

Stakeholder dialogue and engagement

Engaging stakeholders on ESG factors is best conducted as a preventative rather than reactive activity, as stakeholders can help a company identify, mitigate, and manage ESG risks and opportunities before problems emerge.

Disclosing a company’s stakeholder engagement process should shed light on how well a company is integrating ESG risks and opportunities into planning and operations, as well as lend credibility to company claims about leadership in ESG performance.

Executed properly, stakeholder engagement is likely to result in improved understanding by the company of its strategic partners and resources, strengthen relationships with stakeholders and foster higher levels of trust among external parties regarding the company’s actions and reporting.

Stakeholder engagement can also be a source of innovation and new partnerships for strategic growth.

Audience of the report

The target audience of the ESG-report should be the company’s investors though it also it may serve the information needs and other legitimate purposes of a wider audience including stakeholders and civil society.

In financial reporting the question sometimes is to whom the company reports?

Although in most jurisdictions corporate law requires boards to act in the interest of the company (including all its relevant stakeholders), the annual accounts and reports are normally and formally targeted at the company’s investors in general, and the shareholders at the AGM in particular.

However, company reporting is also important for all relevant stakeholders, including the general public. An auditor’s role is largely to confirm that the accounts present a true and fair view of the financial position and results of the company, as reflected in generally accepted accounting principles.

Similarly, the company’s ESG-report has a wider audience than investors, including its wider stakeholders and the public. Long term investors in particular are also focused on the concerns of broader stakeholders, due to the possibility they may represent potential financial opportunities or risks in the long term.

However, as investors with stewardship obligations our GIOC working group emphasises the particular importance and rights of shareholders.

Integrated reporting

While integrated reporting by all companies will not be achieved in the short term, the GIOC working group considers it to be a desirable end goal. It is also recognized that integrated reporting should result from integrated thinking, strategy formulation and policy making.

However, the road towards integrated thinking/reporting may take different courses in different geographies, based on the needs of specific markets.

Above all, getting the content of ESG-reporting right should have priority (substance over form), and this may include supplemental information outside of an integrated report.

Materiality

A company should clearly articulate how the concept of materiality has been applied at the start of any report. Companies should also report the results of their materiality processes, the stakeholders involved in the decision making, issues prioritized and how they are integrated in the corporate strategy. Note that different jurisdictions may have differing formal approaches to the definition of materiality.

Whether a company decides to apply a strict interpretation of materiality (such as the one provided by their regulator) when considering which ESG information to report, or whether it takes a wider view, understanding the process by which companies apply the concept of materiality can be as important as the data provided.

For example, it is possible for salient issues regarding company ESG performance (for example an environmental accident or a labour relations problem) to be regarded by companies as financially immaterial.

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Also note that the approach companies take to materiality need not strictly be defined by financial thresholds; there should be scope for some degree of qualitative judgement.

For their own purposes of investment decision making or dialogue, investors may make their own assessment of what they consider material and whether they agree with the company’s definition.

This can be done by identifying relevant issues as a starting point for identifying material factors. For determining relevant matters, it can be useful to gauge how much an issue might potentially affect the company’s ability to create (or lose) value over time.

Impact, outcomes and Sustainable Development Goals (SDGs)

Companies should focus on the impacts, outcomes and SDGs that are most material or relevant to their business, and subsequently also report on how these issues are addressed.

For investors to allocate capital, make investment decisions and be transparent about systemic risks and SDGs in particular, it is important that companies provide information (including data) on their contribution to society and the SDGs. GIOC welcomes the fact that existing corporate reporting standards organizations are in the process of integrating the SDGs in their reporting standards.

Timeliness

Material ESG information should be communicated to investors at the same time as financial data. For information to be used in investment decision making, it should be communicated to investors at the same time as financial results and should be included in company reporting.

For ESG factors that are being actively managed as a core part of business strategy it should not be difficult to prepare data together with financial data and results.

Consistency and comparability

Disclosures should be consistent over time, be provided in the appropriate context and, when possible, quantify ESG factors. Investors appreciate information that is:

Linked to the company’s business strategy and financial performance.
Quantitative, as it can be more easily compared across time within the same company or with similar data from other companies. Such data is also useful for enhancing investment valuation and credit rating models.
Easy to find, for example by producing an online content index with hyperlinks to boost digital accessibility indicating where all existing ESG information can be found. It is useful to make use of existing taxonomies, for example XBRL, where available
Put in the appropriate context, including comparisons to historical company and industry trends, related corporate goals, benchmarks and targets, relevant ratios, industry averages, and financial results/performance.

Companies should also explain why key indicators may have changed (positively or negatively) year-to-year, and provide an indication how these might change in the future. They should explain their choice of data collection methodologies where it is essential to understand the data.

Standardized comparable full disclosure versus limited customized material information?

Competing investor requests for full disclosure of standardised comparable data and limited and/or customized information, focused on financial materiality could be addressed with a mix of customization and standardisation.

Part of that solution is accepting the current distinction, widely accepted in financial accounting and reporting, between annual accounts (which emphasize data) and annual reports (which focus on story line).

This would follow the same distinction as already exists in financial reporting, where the annual accounts provide the data and the annual report provide narrative and context. It is a three-step approach.

Step 1: All companies shall be expected to report on some general core indicators (including but not necessarily limited to sustainability governance and the role of the board, approach to materiality and risk, and stakeholder management);
Step 2: The company decides which ESG issues they consider relevant and material for their specific company. Companies should make a clear statement and explanation of why they consider ESG issues to be material, either for investors or other stakeholders, but ultimately for the company itself.
Step 3: The company will report on the identified relevant or material ESG issues using a widely accepted standardized and comparable set of data requirements.

In this solution, the annual report would provide the customized (and limited) report on the ESG issues that the company regards as relevant and material, including meeting regulator or listing requirements.

The annual report should communicate how an organisation’s “strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term”.

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Material ESG factors should be included for this requirement to be met. In general this information should be presented together with financial data wherever possible, so that the relevant customized ESG information is fully integrated in the annual report.

Key Performance Indicators (KPIs)

Linked to the above point about standardisation, corporate reporting would benefit from a globally agreed set of common performance metrics as it would allow for comparability by industry, portfolio and across time-series.

Securities regulators should come together to codify industry and sector specific KPIs for ESG factors, making use of the work done by GRI, SASB and other standard setters. There are significant efficiency gains from developing a refined set of industry specific KPIs for the reporting of ESG information.

This may improve the quality of the information produced and create efficiencies in both production and analysis. A core of industry-specific KPIs can then be supplemented by additional disclosures that management considers material and relevant to the individual company.

There is scope to further explore the feasibility of such a set of metrics, taking into account the pros and cons of standardised baseline metrics. This may produce several efficiencies in both the production and evaluation of information set out in registrant filings. The participants in the GIOC are interested and prepared to assist in the exercise of identifying standardised KPIs.

Levels of forward-looking information

To make informed decisions regarding asset allocation, portfolio weighting, valuation, engagement and voting, investors require forward looking information. A company should publish KPIs and targets for material or otherwise relevant ESG issues, and report annually on the progress the company is making on those ESG targets.

The discussion on forward-looking information might benefit by distinguishing different categories of forward looking information:

Regular information about ‘going concern’ business continuity over a one-year term;
Information or data that allows investors to make an assessment if the company is equipped and adapted to manage future risks and opportunities, including ESG risks and opportunities;
Strategic targets for material or otherwise relevant ESG issues and information or data on the progress (or lack thereof) the company is making to meet those ESG targets (KPIs).

Like always companies are encouraged to disclose how their sustainability targets relate to methodologies or frameworks focused on reducing overall environmental and social impacts, such as life cycle assessment and science-based targets for climate emissions.

Key Elements for Corporate ESG-reporting

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