ESG Reporting White paper – London Stock Exchange
In February of this year, the London Stock Exchange (LSEG) published a white paper entitled ‘Revealing the full picture – Your guide to ESG reporting’. This White Paper provides guidance on ESG, CSR or non-financial reporting for companies seeking external investment. It is sometimes difficult for Shareholders or Board Members to grasp the importance of ESG themes. At SustainIt we believe this to be an important piece of work providing sound rational to firms who are not solely seeking investment but guidance within the ESG reporting field in general.
The paper maintains that the guidance should not be overlooked by small to medium sized or even privately held businesses and that quality reporting combined with transparent communication is an invaluable benefit. Non-financial reporting is increasingly being used for firms to “identify their exposure to business risks and assess their ability to leverage business opportunities”.
ESG importance is no longer a thing of the past, even from a financial mind-set. “Recent research from the Global Sustainable Investment Alliance (GSIA) suggests that sustainable investment strategies now represent more than 60% of professionally managed assets for EU investors”.
Quantifying this, “Signatories to the United Nations-supported Principles for Responsible Investment (PRI) now represent $60trn in assets under management, up from $22trn in 2010”.
Furthermore, the message is about strengthening the disparity between investors and companies (issuers) relating to sustainability reporting and understanding. Xavier R. Rolet, CEO at London Stock Exchange hopes that the report will help “improve transparency and disclosure in this increasingly important area”.
Let’s now look a little more closely at the 8 priorities in which the paper has categorised for ESG Reporting.
1. Strategic Relevance
Here, the scene is set once more on where the world currently stands on ESG risks and opportunities, with a particular focus on a new ‘Low Carbon Economy’. “A number of economists now suggest that we are rapidly moving into the next cycle of economic change linked to industrial changes to overcome climate change, environmental erosion and resource depletion”.
Also “a number of the world’s largest investors are allocating capital to companies that are well equipped to benefit from the transition to the low carbon economy, and wish to protect their portfolios against downside environmental, social and governance (ESG) Risks”.
Therefore, just like a model entrepreneur, it is not just about being resilient to the issues surrounding sustainability but the ability to spot opportunities for growth and act on them.
2. Investor Materiality
Section 2 talks about the importance of conducting materiality assessments. This not only helps to highlight pertinent ESG areas affecting the business but helps align this to the needs of the investors. As the needs of various investors differs, materiality analysis further helps to give a better understanding of how the organisation understands its own strategy. Aligning this with international standards facilitates further comparability capacity to investors. The report then gives three good examples of the materiality process one might follow.
3. Investment Grade Data
Something that SustainIt know is vital to ESG reporting is the quality of the data reported by a company. Further assurance of data will give a boost to investors and increase the likelihood of acquiring external capital. Their breakdown includes:
- Comparability and consistency
- Data provision
- External assurance
- Balance – assisting transparency of data
LSEG also explain the need that investors have for raw data in order for them to align their own measurement and selection criteria for companies within a particular industry.
4. Global Frameworks
Here LSEG shares its thoughts on a question that many top level ESG Managers share – ‘which reporting framework should we use?’
“While we are some way from a global consensus on reporting standards, the frameworks developed by the following organisations (in no specified order) are the ones most widely cited by investors: the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), the Sustainability Accounting Standards Board (SASB), the UN Global Compact, the CDP (formerly the Carbon Disclosure Project), the Climate Disclosure Standards Board, and the FSB Task Force on Climate-Related Financial Disclosures”.
The latter framework is explained in a little more detail due to its primary focus of mitigating the potential instability in financial markets. The LSEG also predicts this as a future key reporting framework along with the UN Sustainable Development Goals.
5. Reporting Formats
LSEG point out the various methods in which one can communicate their ESG position within reports and recommends a separate ESG/CSR report that is already common practice. A more interesting point to take away from this section however is that reports should complement ongoing dialogue with investors and not be used as the sole communication to which it provides recommendations.
6. Regulation and Investor Communication
It’s common knowledge that awareness surrounding ESG, particularly, environmental issues is growing. Events such as the Paris Agreement are catalysing the creation of reporting regulations around the world. Data from the corporate register finds that within the last 3 years “over 100 mandatory reporting instruments have been introduced across 64 countries”. However, much like LSEG previously emphasised the need to take advantage of future ESG risks, the paper stresses the need to innovate one’s ESG position against its material concerns and not to adopt the “Minimum-compliance approach” in complying with legislation. This in turn will help companies attract investors whilst also building brand value and opening opportunities within the supply chain amongst many other benefits.
7. Green Revenue Reporting
As part of the ESG reporting process, companies need to identify revenues resulting from ‘green’ goods and communicate these explicitly in any reports. This is helpful in providing a quantifiable and measurable insight into what a company is doing.
“Some of the world’s largest investors are actively allocating additional capital to companies with higher green revenue exposure… Renewable infrastructure funds listed on London Stock Exchange are worth a combined £3.4bn and have raised £2.7bn since 2013”.
You can clearly see the strong monetary motivation for all of the above effort into improving ESG reporting.
8. Debt Finance
LSEG then looks to bond investors and highlights ground-breaking new investment avenues such as green market bonds with their ‘sharp growth’ trends as instruments. “82% of the green bond market is investment grade (BBB rated or higher) and more than half of that is AAA rated”. Contrary to popular belief, “China is one country transforming its financial system to facilitate green instruments, including green bonds, green credit, green equity index products and carbon finance”. Information relating to ‘Social Bonds’ and ‘Charity Bonds’ also appear here.
LSEG declare that there is a compelling case for companies strengthening their reporting and communication by incorporating ESG issues. Investors see the management of ESG risks “as a key test of management quality” as well as being interested in opportunities presented by the ‘Low Carbon Economy’. Whilst the paper does highlight LSEG offerings, it is none-the-less a useful resource for stakeholders that want to fight their case for an advanced ESG reporting strategy.
Due to LSEG’s position of authority predominately in a financial environment, SustainIt believe that this paper will serve as an important guide to both ESG professionals as well as companies looking to improve their non-financial reporting.