The 6 Most Frequently Asked ESG Questions (and an Expert's Answers)
At this point, environmental, social, and governance (ESG) discussions are unavoidable. Regulatory change is coming down the pipeline. With the proposed SEC rules for cybersecurity and climate-related disclosures, companies should take action now to reduce the burden of future disclosure requirements—but change won't happen overnight.
Whether you're just starting your ESG journey or rethinking your current strategy, you inevitably have questions. So, we asked an expert to get the answers you need.
Victoria Sivrais is a Partner at Clermont Partners–one of the only 100% women-owned investor relations and strategic communications firms in the United States. Victoria guides clients around critical communication issues, including best-practice ESG communications.
Based on our joint research, we pulled together the six most frequently asked questions (with answers and checklists to follow) that should allow you to better prepare amidst change.
ESG isn't going away, so more sophisticated education needs to happen. Companies need to understand that ESG is no longer about trying to save the world. It’s now about mitigating risk and driving financial performance related to the investment community.
Here’s a checklist of action items to prepare before presenting your ESG plan to management:
Focus on explaining the why—why ESG matters, and how a strategy will drive valuation for your company.
Research and present current fund flow to your management and board. Explain how capital is allocated to ESG-dedicated and integrated funds, so they can understand why it has to be part of the investment thesis. Integrated and active funds are rising for ESG investment.
Compare your peer’s disclosures to your company’s. Analyze and communicate the current competitive landscape to your management.
Discuss the risk of activism. Activists look for environmental and social risks within a business or lack of disclosure to drive change in other ways.
Help key stakeholders understand that ESG isn't going away. Point to conversations that you’re having with institutional investors. Are they asking about: - Your culture? - Your turnover? - How you’re validating and reviewing what your supply chain is doing?
These questions are all ESG-related—they just may not be using the term.
2. What ESG topics should a company prioritize ahead of the many new requirements proposed by the SEC?
In March 2022, the SEC proposed new cybersecurity and climate-related disclosure rules. While they aren’t final yet and are open for public comments, the SEC is likely to advance regulations that obligate companies to thoroughly detail the processes related to board oversight of cybersecurity and climate-related risk and expertise.
Here are a few considerations to prioritize ahead of the incoming rules:
Define and consider how to address your board’s current ESG oversight.
Develop a blueprint to understand what data already exists today and where you’re missing data you need to collect. Build the mechanics of how you’re going to collect the missing data, and report on it. *Often, companies are already collecting the necessary data—it’s simply a matter of finding it and putting it together.
Understand the difference between your company’s greenhouse gas emissions. They’re divided into three categories for businesses and organizations–Scope 1, Scope 2 and Scope 3. - If you’re not collecting emissions data, develop an infrastructure and reporting framework to start capturing Scope 1 and Scope 2. - Scope 3 emissions are usually the hardest to measure and tackle, as they cover those produced by customers using the company’s products.
Develop a climate risk statement. - Conduct a climate risk assessment and develop corresponding disclosures. - Draft the financial impact statement of the climate events. - Re-integrate the climate risk into your overall enterprise risk management and strategic planning.
Create a cybersecurity task force with protocols. - Define the board’s role in cybersecurity risk. - Prioritize CDP and TCFD questionnaires. Each framework is aligned with the incoming SEC disclosure rules.
3. How do I improve our current ESG ratings?
Rating agencies could potentially impact the allocation of capital by institutional investors, so it’s often a good place to start your ESG journey or revisit to improve your current program. There are many rating agencies and frameworks, and investors ask different questions relating to each.
If you have a minimal budget and resources, start with this checklist:
Complete a key factor analysis—understand your most heavily weighted factors across all the rating agencies.
Look at the commonalities across all agencies, as specific factors will impact you based on your industry.
Research the most material factors or key issues impacting your current scores to evaluate what is holding you back or where you’re falling short.
Select the top 10-15 factors that could, in theory, enhance your score.
Stack rank—in terms of priority—where you can improve scores. This will allow you to factor in the work you can do annually based on the time and budget you can commit. - Near-term priority—Easy, quick wins for policies you already have internally. - Mid-term priority—Policies that you are working on but haven’t fully developed. - Long-term priority—Policies that require internal change before you can disclose them publicly.
Revisit annually to ensure you course-correct your ESG disclosure and maximize your scores.
4. Which ESG framework should we report?
There are several disclosure frameworks and standards you can leverage. To start, identify what your peers are using from a framework perspective. According to ESG Infinite, the standards set by the Sustainability Accounting Standards Board (SASB) are generally preferred for issuers who are just starting with ESG. SASB is a foundational framework well-known among investors and tends to be more flexible and approachable for issuers.
Other popular ESG disclosure frameworks and standards that the institutional investor community has historically cited are:
CDP (formerly known as Carbon Disclosure Project)—the most widely used environmental data platform, with about 19,000 companies responding to the request to complete its questionnaire. Failure to comply can lead to a score of F.
Task Force on Climate-Related Financial Disclosure (TCFD)—a multi-year project to report against, and the heaviest lift in resources. Its recommendations are structured around four thematic areas representing core elements of how companies operate: governance, strategy, risk management, and metrics and targets.
5. What ESG materials should my company develop?
Material development will depend on where you are in your ESG journey. For this checklist, we’ve divided the journey into four phases—from the most accessible lift to the heaviest.
Draft your ESG narrative on one page, and use insights from your key factor analysis to develop the initial story.
Share your ESG narrative on your investor website and in one or two slides in your investor presentation.
Think about your SEC filings. What can you layer into filings about your ESG practices and disclosures?
Expand from one to two slides to an entire investor-focused ESG presentation.
Create a separate webpage dedicated to ESG on your investor site. Ensure the information shared here is not only about sustainability but tailor it to what institutional investors care about.
Create a light CSR report—three to four pages long—the focus is on creating a message for the institutional investment community.
Create a multi-stakeholder CSR report. The focus for this report moves beyond the institutional investment community.
Refine your report and pull elements into digestible content for the investment community.
Research your top 10-15 institutional investors to understand what they look at the most, and to help define your material factors.
6. What should my three focus areas be for ESG in 2023?
ESG assets will hit $50 trillion by 2025, representing more than one-third of the projected $140.5 trillion in total global assets under management, according to Bloomberg Intelligence's ESG 2021 Midyear Outlook report. However, we are seeing significant pressure from the media and regulators to make this fast-growing asset class more tangible, measurable, and transparent.
So, where should you focus your company's efforts this year amidst all the change?
Understand where you sit today as it relates to the proposed SEC rules for issues such as climate-related disclosure and cybersecurity risk. - Figure out what data you haven’t collected, what you shouldn’t be collecting, what you can collect, and what you already have collected. - Decide how to disclose all of the above.
Look at your current ESG materials or CSR report. - Find the gaps within your content and enhance your disclosures.
Revisit or analyze your ESG scores. - Understand how you benchmark and perform against your peers from a radiance perspective. - Figure out how you can enhance what you’re already disclosing.
The increasing pressure for clear ESG regulations is a sign that the space is evolving, and it puts forward an opportunity for leaders over the next 12 months. By taking concerns seriously, IROs and business leaders can use the lens of ESG to analyze their current sustainability strategy.
There is no one-size-fits-all solution, but these expert tips will act as a starting point to help companies understand their material ESG issues, identify risks and opportunities, and guide management to allocate the appropriate resources and attention.