The role of ESG (environmental, social, governance) in business and financial strategy has been steadily growing over the past decade, and events of the past month—from Larry Fink’s CEO letter outlining fiduciary responsibilities to comply with ESG principles to major corporations banding together with the World Economic Forum to introduce new environmental and social responsibility metrics—suggest that 2021 will be a year when companies will be expected to make clear, public commitments regarding ESG issues. Read on for an overview of today’s ESG landscape and best practices for companies as they develop ESG goals and positions, navigate competing metric standards and communicate their commitments to various stakeholders.
Today’s ESG Landscape: High Expectations, but Lacking in Standardization
The ESG landscape has become increasingly crowded with heightened expectations from internal and external stakeholders, as well as more stringent regulation and disclosure requirements—all of which vary by industry and region. There is also a vast network of third-party ratings and rankings in which companies can participate to have their ESG programs and conduct evaluated. These ratings bring their own challenges, as there is no standardization in terms of disclosure requirements, metrics and ultimate grading. All said, few companies feel confident implementing and communicating an ESG strategy.
Stakeholder groups expect companies to be fully transparent across an array of topics—from board size and composition to environmental goals, employee care, supply chain management and everything in between. When approaching ESG, companies must remember that there is no “one size fits all” approach. Companies should focus on identifying their core values and corresponding ESG issues and providing in-depth information and disclosures that address those issues. In doing so, companies can take a well-rounded, insightful approach to tackling, for example, carbon neutrality and board diversity, instead of spreading themselves thin attempting to cover hundreds of disparate ESG factors.
Two ideas to keep in mind are “transparency” and “impact.” These concepts can serve as companies’ ESG north star, reminding them to always be as transparent as possible and to put in tangible effort to support the areas in which their company can have the most impact.
Stakeholder Engagement: How and When to Disclose and Third-Party Ratings and Rankings
Companies should start by fully understanding what their stakeholders are asking for in terms of disclosures and communications. What are the priorities of investors, of regulators, and of customers? What are your own employees asking? What about your board of directors? As companies consider the needs of these audiences, they must maintain that north star of “impact.” What is the driving purpose of the company? Now, how can they communicate that purpose to stakeholders in a way to aligns with their priorities?
Companies have several different disclosure methods they can use to communicate on ESG matters. Historically, standard practice has been to publish an annual responsibility/sustainability report in addition to financial disclosures such as proxy statements and 10-K filings. However, as stakeholders push for more transparency, we recommend a more frequent disclosure schedule. For public companies, this may mean including a brief ESG update in their earnings release and on the quarterly earnings call. Companies with established ESG goals can provide milestone updates via press release or news alert. Stakeholders understand that progress toward ESG goals is fluid and, as a result, a set cadence of communications is not always required. Updates on significant progress is always welcome, regardless of timing.
Once company management has determined when to disclose, they must then consider what to share. Financial filings, ratings, and rankings will all require certain data sets—so of course that information must be included. Thinking again about that north star of transparency, companies should try to provide as much context as possible to support the data. Stakeholders look to annual reports and company messaging to understand what the data means in practice. For example, if a company has relatively low diversity numbers, what steps is it taking to move the needle? If a company works in an industry that requires significant energy use, how is it taking actions toward a more sustainable future? Data can be subjective and doesn’t always tell the full story. Companies must round out their disclosures in a way that guides stakeholders to the data that is most relevant to the business, allowing them to walk away with a full understanding of the company’s values, priorities and actions.
Lastly, awards, rankings and ratings provide unique opportunities for companies to receive third-party validation for their ESG efforts. They can also help to package ESG data in a way that is more consumer friendly. The challenge with these ratings and accolades, however, is that there is little standardization (in terms of data reviewed, metrics for reviewing the data and final scoring) and participation in each is quite intensive and time consuming. Therefore, we recommend that companies only invest in those that are most relevant to the work the company is doing and most aligned with the priorities of their stakeholders. For example, if a company is very focused on equity in the workplace, consider investing in an index like the Bloomberg Gender-Equality Index over an environmentally focused ranking like the Dow Jones Sustainability Index.
Regional Differences: New EU Regulations and Uncertain Standards in the US
As the market tries to keep up with the increasing demand for ESG data, many multinational companies and investors are facing the challenge of meeting the unique needs and requirements of different regions and their regulators. This is best exemplified in the new EU Taxonomy for Sustainable Activities, which we expect will influence company and investor behavior well beyond the borders of the European Union.
The world of ESG investing has been undergoing a revolution in Europe since 2019 and we expect to see it continue to unfold in coming years, driven by the EU Action Plan on Sustainable Finance. These actions are having a significant impact on all stakeholders in the asset management universe (asset buyers, investors, consultants, intermediaries, etc.) and are requiring them to more carefully consider how dollars are being spent and how information is being disclosed.
The taxonomy is largely focused on environmental factors and asks companies across a growing number of industries to disclose how their business actions contribute, or detract from, a list of established environmental objectives. As a result, asset managers and investors are also facing increased disclosure requirements to show how their portfolios are aligned with taxonomy expectations. Given that many EU portfolios are comprised of global funds and assets with U.S. corporate exposure, BCW expects that U.S. corporates will face new questions from their European-domiciled investors about how their operations relate to the taxonomy. U.S. asset managers will also need to consider taxonomy standards prior to selling funds into the European market.
Considering whether the EU taxonomy will directly inform U.S. regulations, some argue that U.S. regulators are not looking to the EU taxonomy as an example by which to increase U.S. reporting requirements. However, given the globalized nature of markets, the taxonomy has pushed many U.S. companies to think more critically about their own reporting and stakeholder communications—even without mandates from U.S. governing bodies. The taxonomy has also shone an even brighter spotlight on the lack of standardization for ESG reporting and disclosures in the U.S. The multitude of frameworks that currently exist in the U.S. has hindered companies’ ability to commit to one framework. There is a reticence among companies to adopt a framework because stakeholders may change their preference to another framework a year later. That said, last year’s endorsement of the SASB (Sustainability Accounting Standards Board) and this year’s TCFD (Task Force on Climate-related Financial Disclosures) recommendation from BlackRock appear to be driving adoption of those frameworks among asset managers and institutional investors.
All of that to say, regardless of where a company is based, BCW advises that ESG regulations will increase and disclosure requirements will expand. Companies should view these changes as an opportunity to showcase their purpose and engagement more deeply with stakeholders.
Finally, our expectations for 2021 and beyond: We will be closely monitoring how the new Biden administration will address ESG, expecting an uptick in requirements building on his recent executive orders related to green jobs, rejoining the Paris Climate Accord and other sustainability issues; and also imagine that consumers and investors globally will continue to put pressure on companies to become more transparent.
This year will be an era of recovery coming out of the COVID-19 crisis. Companies will be afforded the opportunity to demonstrate resilience and a commitment to ESG factors, particularly regarding employee care, supply chain management, and around social justice and equality. For better or worse, there will be winners and losers from this era. Having robust, well-rounded disclosures will be key to helping consumers and investors identify who those winners truly are.
BCW (Burson Cohn & Wolfe), one of the world’s largest full-service global communications agencies, is in the business of moving people on behalf of clients. BCW delivers digitally and data-driven creative content and integrated communications programs grounded in earned media and scaled across all channels for clients in the B2B, consumer, corporate, crisis management, healthcare, public affairs purpose and technology sectors. BCW is a part of WPP (NYSE: WPP), a creative transformation company. For more information, visit www.bcw-global.com.
Gus Okwu, Executive, Vice President | [email protected] | +1 (212) 601-3491
Madeline Patterson, Vice President | [email protected] | +1 (901) 299-4764