Steffie Clement, Isabel Shipley and Rebecca Ward explore how investors are driving ESG disclosure.
It’s no secret that investor interest in sustainability credentials has skyrocketed over the past decade. According to latest estimates, inflows to global sustainable funds grew from $5bn in 2018 to $70bn in 2021. At one point, the finance community appeared to be the unexpected white knight of the global climate crisis. We all slept a little better seeing bankers and financiers putting environment, society, and governance (ESG) above - or at least on par with - profit.
But ESG has come under critical attack of late, and seemingly from all fronts. First insider Tariq Fancy, the ex-CIO of sustainable investment at BlackRock, published a damning perspective on the futility of ESG. Next, giants of business spoke out against the ‘woke’ nature of ESG: Unilever-shareholder Terry Smith’s publicly mocked of the notion of corporate purpose while Elon Musk tweeted that ESG was the devil incarnate. Now we’re seeing a spate of anti-ESG state regulation being proposed in the USA.
Has the ESG bubble burst? And if so, where does that leave ESG reporting?
A recent Harvard Law article argues that political debate shouldn’t be allowed to hinder genuine corporate reporting, and that there is still a strong investor need for ESG disclosure.
“Sustainability disclosures include information which is material to investors as well as information that is important to other stakeholders who have concerns about a company’s activities and products that they perceive as creating negative externalities.”
In short: investors still stand to gain considerably from the valuable content within ESG reporting. Whether this information serves divestment or engagement purposes, material risk disclosures will always deliver impact. Moreover, a recent survey published in the Financial Times reported that 80% of 27 wealth managers polled said they expected interest in ESG among their clients to increase in the next 12 months.
The bubble may be somewhat deflated, but it’s far from burst. If anything, ESG investors are becoming more adept and fluent in sustainability reporting. Disclosure must reflect a new standard of maturity: reporting needs to speak directly to investors, on matters they take interest in, through targeted channels and formats.
Tailoring sustainability content for investor audiences
So how can reporters reflect new investor standards and needs? Here’s some topline thoughts to get you started.
1. What content to include
Draw on the inward/outward impact dimensions of double materiality to distinguish what content is most valuable to investors. While 'ESG' can be understood as the impacts of earth systems and societal issues on business (the inward impact), 'sustainability' can be understood as the impacts business has on earth systems and society (the outward impact). Typically, it’s ESG content developed on this basis that is of most interest to investors because it’s those impacts which affect value creation, both financial and nonfinancial.
Read more on the opportunities presented by double and dynamic materiality here.
2. How to present this content
Put plainly, investors seek relevant, comparable, and measurable content. They want material topics presented in direct relation to the business model, the business strategy, and the business risk. They want this content to adhere to universal frameworks and standards – no easy task given the ever-evolving regulatory landscape, and the sheer choice of framework pathways to follow. And they want to see long-term performance tracking and trend forecasting, too.
Read more on how to navigate the IRFS Sustainability Disclosure Standards here.
3. Where to deliver this content
Things are a little less straightforward on this front. There’s a choice: whether to aim for integration of ESG into financial disclosures, or to elevate ESG content to the forefront by maintaining a separation. There are pros and cons to both approaches, but user navigation and experience is key. In an age of mass content, making sure investor audiences know where to go and how to find specific disclosure is critical and applies to downloadable publications as much as to digital ecosystems.
At RY, we blend sustainability, stakeholder engagement and digital reporting experience to make sure your ESG content lands firmly with investor audiences. Want to chat about your communications? Drop us a line.