Getting Started on ESG Reporting

Emerging growth companies and established businesses are vying for investor attention and learning a vital lesson — the criteria for capturing the attention of the investment community have changed. Today, it’s not just about dollars and cents. It’s also about the business’s environmental, social and governance (ESG) messages.

The focus on ESG is an essential development in demand from investors and other stakeholders, including employees, customers and suppliers. However, in its clamor for more reporting, investors and other stakeholders failed to provide guidance. This includes where to begin, what matters most and what types of information they should disclose on their website, in the proxy, 10-K and other channels. 

In this void are groups of companies staring at ratings, rankings and frameworks with little to no clarity on where to start. Help is coming. 

As many of you are aware, the global ESG reporting landscape is rapidly changing. Announced at the COP26 conference on climate was the creation, by the International Accounting Standards Board, of the newly organized International Sustainability Standards Board (ISSB), which will further consolidate ESG reporting frameworks and standards, including The Value Reporting Foundation and the CDSB. Many internationally listed public and private companies are closely watching the SEC for expected proposed rules on Climate Risk and ESG reporting.

When solidified, these standards will go a long way to providing the guidance businesses seek. Still, it will take time, which is something companies don’t have a lot of with an investment community that demands action now. To get ahead in this ESG journey, start by following some steps that are widely recognized as effective: 

• Focus on your material indicators. There are multiple sets of frameworks available, and while each one is different, they overlap. Our company, which helps companies meet financial compliance challenges, recommends focusing primarily on SASB, GRI and TCFD, and seeing where these connections exist. Next, determine five to seven material indicators relevant to your industry group and for which you have information to disclose, such as climate, labor, human capital, social inequality, sustainability issues and so on.
• Examine peer disclosures. Check on your industry peers and specifically their disclosures, including proxy, 10-K/AR, website. These are an excellent resource for uncovering important topics to your industry that may not have been identified in step 1. From there, assess what actions the business needs to take to match or exceed the peer accomplishments.
• Create your thematic principles. Between the material indicators and peer-related research, the team should have identified anywhere from seven to 10 topics. Eventually, these will be the foundation of your disclosures. First, have your communications team turn these into three to five thematic principles. For many, these are what I like to call “three Ps tenets” — people, purpose and planet.
• Develop your ESG content. Build content around these principles that meet the criteria discussed earlier. Bring in ESG consultants, analysts and writers to help, and have them work collaboratively on these pieces.
• Think visually. As a last step, I recommend turning this ESG content into infographics that mirror or are complementary to company branding.

After completing these steps, shift to disclosure. Here are suggestions on what to disclose and where.

Website

For many, the logical and easiest starting point is your website. You can post all of your company policies, covering data privacy, workplace health and safety, equal opportunity, and anti-harassment/discrimination, among others, in as much depth as you like. You can also include this information in your Investor Relations section.

Proxy statement highlights

For some companies, disclosure might start with the proxy, where businesses can share critical highlights that could impact influential ratings and rankings. Some areas to feature:

• Board oversight. If your business has a committee in charge of board oversight, list them here along with their competencies and qualifications. In addition, you might want to report on the diversity of the board itself. One thing to keep in mind is that investors often look for multiple views, some may focus on ethnic and racial diversity, while others may focus on gender.
• ESG and human capital program overview. The proxy should include the same programs and policies from the website, but just the top highlights, including potential risks, opportunities and priorities and performance in these areas.
• Executive compensation. Any ESG-related compensation metrics should be highlighted, such as health and safety, employee development and diversity initiatives.
• COVID impact statements. Focus on your COVID-related policies such as employee health and safety, remote work and efforts to maintain productivity and morale.

 Annual report/10-K

Integrated reporting that features financial reporting and a company’s operations and non-financial data isn’t as prevalent in the U.S. as in other countries, but this should not preclude you from including these details if you want. This information will always have an audience with investors who are looking for additional factors when making decisions.

Regardless of what you do, keep an eye on the SEC’s calls for a principles-based approach to human capital disclosures. Part of SEC rule S-K modernization, these disclosures could eventually call for companies to include human capital resources and any human capital measures or objectives (that are a focus of managing the business) in their 10-K or other filings. Examples here include the number and types of employees with a specific breakdown into areas such as full-time, part-time, seasonal and temporary workers.

The corporate social responsibility (CSR) report

These reports represent the best opportunity to showcase the company’s complete CSR story. Be sure to include details on programs and how they are impacting the environment and community. This is not a one-size-fits-all approach either. Businesses can choose which format suits them best. For one, it may be a short six-page SASB fact sheet, while for others it could be a 20-plus page summary sustainability report.

There is good reason to be encouraged about the creation of universal ESG reporting standards. These will likely include the guidance that businesses require. But companies should not wait until standards are formalized. With the insights provided here, you can begin your ESG journey today.

Learn more about DFIN’s ESG Solutions.