Award-winning former IRO and ESG expert Mikkel Skougaard says there is a tendency to over-report on non-material issues. He advocates a back-to-basics approach to ESG
It's no surprise that most companies are struggling to make sense of the increasing web of interconnected ESG disclosure frameworks, standards, codes and rules. At the same time, the complexity of the ESG rating landscape compounds the challenge of what to report, and how. As a result, more clients are asking us how best to get started or, for those already on the journey, how to navigate through this increasingly complex reporting landscape.
Going back to basics, one of the primary purposes of any ESG report is to provide capital markets with financially material, decision-useful data that can support more accurate valuation analysis. Given the historical focus of ESG reporting on a company’s wider stakeholder base, however, there has been a tendency to over-report on issues that are financially non-material.
This often results in large quantities of ESG data and a narrative that obscures what is important for capital markets, leaving investors uncertain as to what kind of ESG information to incorporate into their valuations.
Against this backdrop, companies should play a more active role in delivering and explaining what factors could substantively affect their ability to create value over the short, medium and long term. And while the standardization of ESG metrics has its merits, a blanket reliance on a set of pre-defined metrics with little consideration of company-specific context is unlikely to be sufficient to satisfy the requirements of investors.
That’s because each company is different, and these differences need to be reflected in a firm’s reporting strategies and outcomes. ESG reporting – and, for that matter, ESG integration – is not static, but rather is an ever-evolving and dynamic process that needs to be continually deepened, rethought and redrawn so that capital markets – a major ‘consumer’ of ESG data – can better price the unique ESG risks and opportunities facing a business.
There are several key factors to consider before embarking on an ESG reporting journey: purpose (why do you report?), prioritization (who do you want to reach?), placement (where should information be located?) and patience (starting out small and building from there – nobody is expected to go from zero to hero overnight).
Once these have been agreed, two factors precede a good ESG report (frameworks and standards aside): intimate knowledge of the company and the industry, and a thorough materiality assessment. The combination of these two should provide an optimal starting point from which any company can identify which areas of information – and subsequently which key metrics and supporting narrative – should form part of its core ESG reporting, which will serve as its foundational disclosure.
If done well, materiality-driven ESG reports can advance the capital market’s ability to sort through the clutter and distinguish important signals from an ever-expanding universe of ESG noise.
Finally, we are often asked where the responsibility for ESG reporting should lie. IR is well positioned to be the driver of a successful ESG reporting journey, given its comprehensive company and industry knowledge, its extensive external network and its close working relationship with the CFO (and thus financial reporting).
IR can help make sense of it all by connecting these increasingly interdependent factors and explaining the financial impacts of non-financial risks and opportunities.
Mikkel Skougaard is principal consultant at Verisk Maplecroft
