Investor information – how to provide real value
Investors are looking for materiality and clarity on environmental, social and governance issues from corporate reporting
The analysis of environmental, social and governance (or ESG to use the responsible investment industry vernacular) issues can no longer be dismissed as a niche approach to investment.
Many investment organisations – investment managers, asset owners, investment banks and insurance companies – have appointed individuals or established teams charged with looking at ESG issues and working out how they can deliver better investment returns through a focus on these issues.
This mainstreaming of ESG analysis is seeing investors pay much greater attention to the quality and utility of the ESG information being provided by companies.
While different investors are – inevitably – using this information in quite different ways, a number of common themes emerged from the research into a recent report into the ESG capacity and information needs of investors.
Relevance and position
First, while some companies provide a robust account of how ESG issues are relevant to their business, most do not provide the information or data necessary to allow investors to understand the company’s position on the issue(s) in question.
More specifically, most companies fail to provide adequate information about the company’s historic (trend) and expected future performance on these issues, about the significance of these issues to the business, or about the relationship between these issues and corporate strategy, short- and long-term value creation and risk management.
Second, ESG performance reporting does not allow meaningful comparisons to be made between companies. There is an inconsistent application of calculation methodologies, a general lack of information on the scope of reporting and a lack of clear definitions of the indicators being reported. For example, when companies report employee turnover it is often not clear whether they are including or excluding redundancies.
Third, the majority of ESG-related information is only reported once a year and is generally backward looking.
This contrasts with other investment-relevant parameters (eg oil prices or share prices) that are updated much more frequently, and with financial information that tends to be much more forward-looking. As noted by one interviewee: “You can’t have an integrated approach with backward looking data.”
Information from integration
Investors see integrated reporting as playing a potentially critical role in aligning financial and non-financial performance reporting.
Integrated reporting is expected to force companies to talk explicitly about how ESG issues are relevant to their business models and to their strategy. Investors hope that this, in turn, will encourage companies to provide more forward-looking information, to focus on material ESG issues and to put ESG issues into a business context.
However, investors recognise that corporate responsibility and integrated reporting are both important, and do not see the debate as being about one or the other. Rather, most are, at least at this point, interested in both strategic and performance-related issues. In other words they expect companies to provide both a coherent account of how ESG issues are relevant to their business and provide the specific data to enable their performance on specific ESG issues to be properly assessed.
As investors professionalise and strengthen their focus on ESG issues, companies will be required to take a much more focused look at how they report and what they report. Scattergun or ‘me too’ reporting is unlikely to be seen as a credible response to the demand from investors for data that is focused on key drivers of business and investment value.
The key conclusion for companies is that they need to delineate between those issues that are important to their business – and to explain why they are important – and those that are important to stakeholders but less important to the business (and, again, to explain why this is the case).
Dr Rory Sullivan is a senior research fellow at the University of Leeds, a strategic adviser for Ethix SRI Advisers and a member of the Ethical Corporation advisory board. He is the author of the recently published UN Principles for Responsible Investment report: Building the Capacity of Investment Actors to Use Environmental, Social and Governance Information.