Deeper ESG disclosure is expected by investors and regulators
Today, ESG topics are not just a ‘nice to have’ element of corporate disclosure – they are a crucial part of telling the corporate story. Each organization’s ESG story is its own to tell, and the metrics, KPIs or strategies that suit one issuer may not suit another.
The definition of what are considered to be important ESG topics has also moved beyond just climate, board diversity and governance. A recent Nasdaq analysis of earnings transcripts from the companies that make up the MSCI USA ESG Leaders and the Russell 3000 indicates that human capital management, supply-chain management and corporate culture now constitute three of the five most-discussed themes.
But while approaches may differ, promoting and amplifying that message is uniformly important across the board. The results of amplifying that story speak for themselves. A 2021 survey carried out by Investopedia and sustainability website Treehugger found that 67 percent of investors said they would buy more shares in companies that have an ESG focus. The same poll found that a majority of millennials – around 64 percent – believe ‘ESG principles will be standard in the future’.
Another factor at play is that market regulators are widely considering which aspects of ESG disclosure should be made a contingent part of being publicly listed. Though in the US there are currently no mandatory ESG disclosures at a federal level, the SEC does require public firms to disclose any information that may be material to investors, which undoubtedly includes ESG-related risks.
There is growing policy momentum in this area: the creation of the SEC’s Climate and ESG Task Force in its division of enforcement, a stronger approach to enforcement on climate-related risks and an ongoing review of mandatory ESG disclosure all point to the regulator making fresh recommendations in this area before the end of this year.
While there are no requirements relating to earnings, investors and analysts expect there to be consideration of ESG factors – not limited to climate, governance and workforce information – in what a company discloses.
A big part of the puzzle is that the more ESG-related information that is published, the better the overall effect. The more companies can promote and amplify their stories, the better they will be perceived in the marketplace – not just by their investors, but also by ESG frameworks, other benchmarks, ratings agencies and the entire ecosystem.
