Once upon a time, environmental, social and governance (ESG) factors were a niche interest among asset owners, asset managers, banks, brokers and investment consultants. No longer.
Investors now routinely analyse information on ESG performance alongside other financial and strategic information in order to gain a better understanding of companies’ future prospects
There are growing trends in both Regulation, Standards and Reporting. The UK has announced that ESG reporting will be Compulsory. The London Stock Exchange together with FTSE Russell are have launched ESG Disclosure Scoring.
Investor focus on ESG continues to increase – a trend accelerated by the COVID-19 global pandemic. The challenge for issuers is to focus and improve their ESG performance as well as how they communicate and engage with investors. London Stock Exchange’s ESG Disclosure Score helps issuers to see where they might improve their most important sectors specific ESG metrics and understand how they fare in comparison to their peers. Now in its second year, the ESG Disclosure Score shows a positive trajectory of disclosure, but analysis found that more work is required to improve disclosure across all industries, and in particular for the ‘Social’ component of ESG.
Issue to Consider
· ESG Reports will be gaining even more prominence than the Financials
· No standardized Reporting
· No audit Process – Role of Accounting Associations
· E- Environment - overreliance on carbon mitigation
· S- Social Coming more into play – especially with Covid19
· G- Governance – also becoming more into play die to increased risks Scenario and Innovation to challenge existing business models
· Whitewashing – ESG with no substance
· ESG Reporting , measurement and Verification is creating a new class of Professional Services – will require re-training / new skills – “ESG Financial Engineer”
It is important for any company to be able to explain how its core business models and strategies may be impacted by ESG trends, and how it is seeking to position itself either to benefit from them or manage and mitigate risks associated with them. This provides the context for ESG reporting and allows investors to assess how well prepared the company is strategically for changes in its operating environment.
A number of the world’s largest investors are allocating additional capital to companies that have higher green revenue exposure or are better equipped to fulfil sustainable goals.