ESG is more than a reporting exercise – investors want to see transparency, progress and added value

By Axaule Shukanayeva

Transparent and effective ESG reporting and communications are increasingly becoming one of the key expectations of investors. The Task Force on Climate-Related Financial Disclosures (TCFD) reporting came into play in the UK in April this year, and the International Sustainability Standards Board (ISSB), created in November 2021, is planning to consolidate the existing ESG reporting standards and create a reliable, transparent framework to provide comparable sustainability-related disclosure for investors and capital market participants. This means that investors, regulators, the ESG rating agencies, customers, employees and media will be able to scrutinise the ESG performance of companies. A key expectation of all of them is transparent and timely ESG communication and reporting.

The ESG reporting metrics will vary from company to company, depending on their size, industry and jurisdiction. Therefore, having a good understanding of investors’ most common expectations and challenges will help companies to prioritise and formulate their ESG strategies and initiatives.

According to McKinsey’s recent article, “Five ways ESG creates value”, a well-positioned ESG proposition leads to higher value creation and links to compelling financial incentives starting from top-line growth, cost reductions, regulatory and legal interventions, to productivity uplift, and investment and asset optimisations.

Investors are looking for companies that are not only responding to ESG-related risks and challenges but taking proactive steps to reorganise their business models to operate more sustainably and prosper in the future. Thinking about ESG encourages more innovative strategic thinking and is an opportunity for companies to differentiate themselves from their competitors.

Therefore, effective ESG communication starts with defining a clear purpose and setting a measurable goal. This is an opportunity for companies to communicate their business value and long-term impact. Having a compelling and engaging narrative that tells the story of a company’s ESG journey is more engaging and effective.

All initiatives relating to ESG need to be aligned at board and executive management level. Board ESG competence and oversight are under growing scrutiny from investors. Therefore, the board and executive management should be prepared to discuss the company’s perspectives on ESG, including the risks and opportunities, as well as answer questions on board composition, diversity, and their position in comparison with their industry peers.

According to EY’s 2022 Proxy season preview on investors’ expectations on ESG reporting, investors want companies to make long-term commitments with shorter-term, interim goals; clear reporting on progress; and direct board oversight. They also look for transparency and clear communications on the challenges companies are facing and ways they are handling those challenges. They seek more clarity on companies’ innovations and investments to find solutions to address those challenging and complex risks.

In conclusion, it is key to engage and maintain relationships with investors by proactively reaching out to find out their ESG-related concerns and recommendations, and address them on an ongoing regular basis. These initiatives will help companies to build and maintain relationships with their investors, improve access to capital and generate greater long-term value for all stakeholders.