The Nasdaq stock exchange recently analyzed proxy statements of 50 S&P 100 companies and reported a number of trends that may be shaping up as best practices in ESG Disclosure.
Corporate boards are recognizing how important ESG has become to investors and are making adjustments accordingly. The Nasdaq report highlights how companies are acknowledging that they must increase the incorporation of ESG strategy into their business operations and financial projections. Here are some practices relating to ESG disclosure that boards can consider adopting from the 50 companies analyzed in the report:
• Communicate ESG/governance in a letter to investors and stakeholders. One practice that is growing is boards actively demonstrating how they are responding to investor and stakeholder ESG concerns. The majority of companies in the Nasdaq report (70 percent) featured a letter to shareholders detailing director engagement efforts with shareholders and highlighting director ESG skills and experience. This gives the board a chance to tell the positive side of its dealings with ESG and explain how its efforts are benefitting all stakeholders.
• Increase board engagement on ESG/Sustainability topics. The report shows that 85 percent of corporate boards surveyed are engaging stakeholders on climate change and environmental sustainability issues. This is likely a reaction to shareholder concerns over the Covid-19 epidemic. This might involve talking to shareholders about producing climate change or sustainability reports before shareholder proposals ask for them. These reports can disclose how the board’s climate change, sustainability and human capital management strategies enhance the long-term growth possibilities of the company.
According to the report, Intel Corporation’s proxy included insights on multiple ESG topics directors discussed with investors. Those insights included Intel’s “integrated approach to business strategy and environmental and social sustainability, as well as the impact of ESG metrics on executive compensation.” Taking a similar approach might benefit some boards.
• Tie ESG to compensation. The report showed that many companies are including ESG measures in their compensation disclosures. By tying ESG goals to executive compensation, the chances of those goals being met improves. Reducing greenhouse gas emissions, improving diversity and inclusion numbers and improving environmental health and safety measures were primary areas of focus. Each company will have its own ESG and sustainability goals that could benefit from this approach.
• Change board committee names and director assignments. Many boards have changed the names of committees and reassigned director responsibilities to address the increased focus on ESG/sustainability issues. For example, “Bank of America changed the name of its Compensation and benefits Committee to the Compensation and Human Capital Committee, and changed the name of its Corporate Governance Committee to the Corporate Governance, ESG, and Sustainability Committee.” Of course changing the name of the committee is less important than assigning new responsibilities to the directors on the committee.
According to the report, 78 percent of the companies surveyed have a board committee that oversees environmental sustainability issues and 68 percent have compensation committees that also oversee human capital management issues. More boards are also disclosing that they have at least one board member with skills related to “environmental policy, sustainability, corporate responsibility or ESG.” These changes show that more boards are accepting the increased responsibility of monitoring the impact ESG issues can have on the long-term fortunes of their company, employees, shareholders and stakeholders.
The importance of ESG issues is likely to grow, so boards need to begin addressing these issues in ways shareholders and stakeholders can feel comfortable with. Nasdaq’s report sheds light on ways some companies are meeting that challenge.
