Your guide to ESG reporting
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.
Issuers’ ESG performance on subjects such as resource use, human rights, health and safety, corruption and transparency is increasingly used to draw conclusions about the quality of their management, identify their exposure to business risks and assess their ability to leverage business opportunities. Therefore it is becoming more and more important for companies and other issuers to communicate with investors clearly and accurately on these aspects of their performance.
The intention of this Guidance is to help companies gain a clear understanding of what ESG information they should provide and how they should go about providing it. This is a task for which London Stock Exchange Group, as a leading international markets infrastructure provider connected to issuers, sell side and investors is ideally placed.
About London Stock Exchange Group
Sitting at a critical junction between issuers and investors, London Stock Exchange Group plays an essential role in supporting global sustainable economic growth.
With more than 2,700 companies hosted on our markets, we seek to recognise and encourage dynamic companies that will drive long-term economic prosperity; helping them improve the sustainability of their business and enhance their ability to raise capital for growth and employment creation. At the same time, through FTSE Russell, our benchmarking and analytics business, we seek to support investors in making informed and sustainable decisions; providing them with the information and tools they need to assess issuers’ strategy, performance and governance.
Who this Guidance is for
Institutional investors are interested in ESG issues for all of the entities they invest in, irrespective of whether they are large or small, equities or bonds, listed or unlisted, across all industries. And in our view, whatever the entity in question, the characteristics of high quality reporting and effective communication with investors are always broadly the same. Therefore we believe that you will find this Guidance equally relevant to your organisation whether it is a large publicly listed issuer with a long track record of reporting; a smaller company; a privately held business; or a debt issuer.
How investors use ESG information is changing
In recent years, the views of investors in this area have matured significantly. ESG-related information has moved from a ‘peripheral’ to a ‘core’ part of investment analysis, across all asset classes.
Signatories to the United Nations-supported Principles for Responsible Investment (PRI) now represent $60trn in assets under management, up from $22trn in 2010. Almost all leading institutional investors of UK and Italian listed companies are PRI signatories. Recent research from the Global Sustainable Investment Alliance (GSIA) suggests that sustainable investing strategies now represent more than 60% of professionally managed assets for EU investors.
The need for issuers to respond to this demand for information is clear. By disclosing the information that investors want, issuers can provide reassurance that they are effectively managing business risks and identifying opportunities. There is growing evidence that issuers that publish high quality information on the longer-term implications of ESG for their business are more likely to attract and retain long-term investors. These issuers can also reduce the cost of capital and increase their ability to raise new capital to finance sustainable projects.
The process of reflecting on, analysing and reporting ESG issues provides important insights into the positive and negative implications for financial and operational performance. This also applies to decisions about strategy and capital expenditure. Further, having a clear view on ESG issues and strategy positions businesses at the forefront of opportunities presented by the unfolding sustainable and low carbon economy.
While there is a compelling case for companies strengthening their reporting on ESG issues, research suggests that Chief Executives tend to overestimate their success in communicating with investors: in a recent study, over a third of companies believed they were able to quantify the business value of sustainability initiatives accurately, yet only 7% of investors agreed.
This discrepancy can be ascribed to a number of practical challenges, including: investors finding it difficult to access appropriate data and information; issuers failing to understand what information investors need; investors using different ESG information in their investment research and raising different questions with issuers; and issuers’ needs and interests differing in terms of the ESG issues that they see as important.
The aims of this Guidance are to:
— make companies more aware of the importance of providing high quality ESG information, and engaging investors on sustainability-related issues;
— stimulate interest in the innovation opportunities opened by this new economic paradigm;
— help issuers and investors to navigate the complex landscape of ESG reporting;
— enable richer data flows and dialogue on ESG between issuers and investors;
— support the consolidation of sound global reporting standards; and
— enable investors to make better informed investment decisions.
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