As we approach next year, one issue that will undoubtedly show up on corporate board agendas is the reassessment of the impact that environmental, social and governance reporting has on their business. The World Economic Forum recently released a newly formulated set of ESG reporting metrics and disclosures it believes should set the international standard for ESG reporting. The hope is that a uniform set of standards for disclosures will lead to a comprehensive global corporate reporting system.
The newly recommended ESG standards include a set of 21 “core metrics and disclosures” that focus on activities within an organization’s own boundaries, and 34 “expanded metrics and disclosures” that represent more advanced ways of measuring and communicating “sustainable value creation.” The metrics are separated into “four pillars” that address many of the tenets of stakeholder capitalism – Principles of Governance, Planet, People and Prosperity. By having all companies agreeing to use the same standards for ESG reporting, the World Economic Forum hopes to make stakeholder capitalism more measurable.
Considering that the five major independent global framework and standard setting organizations have endorsed the idea of creating an international standard for ESG reporting (the Carbon Disclosure Project, the Climate Disclosure Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council and the Sustainability Accounting Standards Board), these metrics should not be ignored by corporate boards. There is a growing consensus that dealing effectively with ESG issues contributes more to the success of a corporation than it has in the past. The release of these proposed new standards provides the perfect opportunity for boards to reassess the key environmental, social and governance challenges that their company faces in the next five years. After identifying the ESG challenges they face, directors should consider how they can use some of the new metrics to communicate how they will deal with ESG issues in ways that will be beneficial for all stakeholders.
What are you currently doing regarding ESG and sustainability disclosures? Boards should do a comparison of what the newly recommended metrics and disclosures are and what their company is actually disclosing. This will provide insight into what regulators may be looking for next year after these recommendations are ratified. Which ESG issues does your company currently disclose? Are your shareholders asking for more information related to ESG issues? Does your company issue a sustainability report annually? Are you disclosing enough or do you need to do more?
Assess potential climate change-related risks and rewards for the company. Regulators’ concerns about climate change are not going to disappear, so boards will need to address any climate change-related risks with responses designed to improve the company’s long term financial position. Would moving away from using fossil fuel improve the company’s bottom line? Would making renovations, improvements or innovations to reduce the company’s carbon footprint save money over the next few years? Are there climate change-related partnerships the company could pursue to improve its reputation and bottom line? This is a good time to explore such issues before shareholders ask about them.
Do you agree with shareholders about which ESG information should be considered material? Shareholders are asking for more information relating to ESG issues, arguing that they want to make investment decisions based on company strategies that incorporate some of this data. Shareholders believe that a great deal of ESG information they are not getting impacts the long-term growth of the company. Shareholders have initiated lawsuits to get access to ESG-related information. It is probably better to disclose such information rather than be forced into litigation. Engaging with shareholders and compromising on disclosures makes sense.
What type of data are you disclosing related to diversity, equity and inclusion? Given that Blackrock, Vanguard, State Street Global Advisors and other large institutional investors have announced that they will vote against directors at companies that are not showing progress toward diversity & inclusion, all boards should reassess what they are disclosing regarding these matters. These disclosures will likely be expected during this period of stakeholder capitalism, so boards need to determine how they are going to meet those expectations.