Environment, social, governance (ESG) reports are not entirely new.
Large companies have been reporting on their environmental and social impacts for the last 30 years in their corporate social responsibility (CSR), sustainability or corporate citizenship reports. In some ways, I could argue that ESG reports are just the same as these earlier reports – they cover topics such as GHG emissions, water, safety, ethics. But in other ways, I could say ESG reports are completely different: who they are written for and how they are used has significantly changed.
These are five trends I am seeing as companies are shifting from CSR reporting to ESG reporting:
Trend 1 – Laser focus on providers of capital
While these reports were traditionally written for all stakeholders (communities, employees, investors, business partners), current readers tend to be providers of capital. Investors, lenders, and insurance providers have become the main audience of ESG reports as they are looking for a meaningful discussion of how a company is managing ESG risks that could have financial impacts. While reports used to be an exercise in demonstrating good corporate citizenship, they are now primarily intended to inform investment decisions, in capital markets or within a privately held portfolio.
Trend 2 – The number of reporting companies has increased exponentially
In just this one public database, there are currently 139,982 sustainability reports from more than 20,000 organizations.
For years, sustainability/ESG reporting has been an expectation for multinational publicly traded companies, as well as for large or medium-sized companies in extractive sectors. More recently, we’ve seen a domino effect on smaller and private companies who are feeling pressure to disclose their ESG risks and impacts. This is a direct result of Trend 1, a shift to capital providers being the predominant users of ESG reports.
Just like investors in publicly traded companies, shareholders of private companies are keenly interested in how companies are managing environmental and social risks, positioning themselves for emerging opportunities brought on by ESG trends, and performing relative to other holdings in a portfolio.
In addition, reporting expectations are increasing for companies in sectors that have traditionally been perceived to have lower environmental impacts. There are two reasons for this: (1) The companies could have significant social impacts (which have reached a high level of societal awareness) and/or (2) The companies are exposed to, or contribute to, a value chain that has a significant environmental or social impact (e.g., although banks might have a lower environmental impact, they can have significant cumulative risk exposure to other industries with higher environmental impacts).
Trend 3 – Climate is dominating the conversation
While companies used to tiptoe around mentions of climate, ESG reports are now expected to include fulsome discussions on risks related to climate and the transition to a low carbon economy. Investors want to know how companies are anticipating and managing regulatory changes related to climate change. The use of TCFD (Taskforce for Climate-related Financial Disclosures) guidelines to disclose this information is dramatically increasing. According to a recent study, of the 228 companies listed on the S&P/TSX Composite Index in 2019, 47 per cent either mention or align their disclosure to TCFD (that percent was only 25 per cent in 2018).
Trend 4 – Companies are extending their time horizons for reporting
As conversations about climate scenarios deepen, 2030 and 2050 dates are being thrown around like confetti. Many companies have set targets that span the next 10 or 20 years. While reports used to focus on performance for the previous calendar year, they are now becoming more strategic. As such, they contain more forward-looking information, not necessarily in terms of predicting performance, but rather how companies are anticipating future risks and opportunities and adjusting their long-term business strategy in response.
Trend 5 – Reports are getting longer
One-hundred-page ESG reports are now becoming more the norm than the exception. For all the reasons listed above, reports are getting longer. The increasing influence reports have on decisions mean that companies are investing extra time and resources into making sure their disclosure is as comprehensive as possible. This means that list of ESG topics is ever expanding and now includes: tax strategy, anti-competition, cybersecurity, diversity and inclusion, COVID-19 response, and others.
To be clear, I am not saying long reports are better reports. Rather, reports need to meaningfully cover a company’s material topics. As the scope of material topics keeps increasing (i.e., social and governance risks, climate-related risks and opportunities), reports, even concise ones, are getting longer. And that’s OK. The end goal is to get decision-useful information to those who need it.
To conclude, the ESG reporting field was not immune to the events of 2020 that affected individuals, companies, and nations around the globe. This change has further supported the move of ESG reporting move from a “nice to do” to a “must do” – a shift that had already started and will continue in years to come.
If you want to learn more about the current state of ESG reporting and how it impacts your company, Responsibility Matters is offering two courses in partnership with JWN Energy on June 11 (ESG fundamentals for oil and gas producers), and June 17 (ESG fundamentals for oilfield service providers).