Environmental, social and governance reporting can fuel growth
24 April 2019
Stuart Phillips considers the growing investor attention on ESG reporting, the potential benefits and what initial steps companies can take.
This article originally appeared in The Guernsey Press Q1 Business Review.
In today’s business environment, interest in corporate responsibility extends far beyond new hires and customers. The influence of environmental, social and governance (ESG) issues on investor selection is a growing trend. Socially responsible investing is a relatively new practice but is gaining considerable traction. However, promoting ethical business values, CSR initiatives and stories about wellbeing programmes is no longer enough to convince investors of high standards of corporate responsibility. Now, data-led evidence is in high demand. Whilst investors may previously have made decisions based primarily on a company’s financial track record only, they are increasingly looking at other aspects of corporate performance. ESG reporting fuels investor confidence in a company’s long-term prospects.
Tim Mohin, Chief Executive of the Global Reporting Index, a partner of the United Nations Environment Programme, recently quantified the current level of investor decision-making being shaped by corporate sustainability data: a 24% upturn of global assets being managed under responsible investment strategies since 2014 – an incredible $22.89 trillion of assets, more than the entire GDP of the US (McPherson, S. Forbes. 2019).
What wider commercial benefits are provided by focussing on the three components of planet, people and profit in financial reporting?
Hong Kong is a market where mandatory ESG reporting has been in place since 2016 - every listed company is required to annually disclose certain ESG information. The findings of a recent survey conducted by our colleagues at BDO in Hong Kong across 300 listed companies cited the trends in ESG reporting and the many benefits it offers:
- The majority of those companies surveyed that were disclosing information for the first time went above and beyond providing what was mandated. Being compliant is not seen to be sufficient and companies can do more than meeting minimum requirements.
- Sustainability and financial performance are closely linked. Indexed constituents and companies often produced higher quality ESG reports and, similarly, companies that were highly rated for their CSR practices provided a better long-term investment return.
- Improved credit ratings with leading credit agencies which take ESG criteria into account when assessing creditworthiness. In turn, this is likely to increase investor confidence.
- ESG reporting is a good indicator of whether a company is adequately managing risk. An ESG materiality assessment helps to identify, assess and prioritise ESG risks.
- ESG reporting that progresses beyond merely environmental and social performance and embraces the supply chain is seen as key to building a company’s brand.
- Credibly communicating ESG performance in an open and transparent manner helps to build trust with a wide range of stakeholders.
- 60% of the companies surveyed invest in initiatives to reduce their use of resources and emissions through efforts like replacing traditional light bulbs with LEDs, upgrading air conditioning systems and installing waste-water recycling systems. Implementing such reduction measures has enabled many companies to substantially reduce costs.
What are the initial steps to start the journey towards ESG reporting?
- Integrate an ESG committee into your corporate governance structure.
- Identify the key environmental and social issues that present risks to your company.
- Collect and examine relevant data and benchmark against your peers.
- Devise a system of external reporting on ESG, considering all relevant stakeholders.
In summary, ESG reporting can provide a route towards better corporate performance, whilst building your brand and growing stakeholder engagement.