Dear Corporates – Do not FAIL your sustainability reporting
I just had to write something about this. We’re in the middle of updating a lot of ESG research reports as companies now have for the most released their 2020 annual reports and sustainability reporting, etc.
Common for them all is that we see an increase in sustainability reporting volume this season again. A lot of more words and some more relevant information, but clearly less increase for the latter.
We’re specialised in ESG Research in the smaller and private segments of the investment universe, and you will see less stringent sustainability reporting in this segment, with some exceptions. But we also do ESG research on some larger Investment Grade companies, and they are also exposed to some of the following elements.
Some issues and our advice hereunder.
SDGs used as flowers for decoration?
It is very nice with the 17 SDGs, right? And the companies like to tell us how they contribute to a selection of them. We see some really farfetched links here sometimes and some mix up between “contribution” and “not making it worse”. Some companies do not even bother to say which ones they contribute to but say the 17 SDGs. Well, well. Now in general ESG analysts are not all big fans of SDG based reporting. Why? Because companies use them to look good, not as a tool for their strategic development. Also, and not surprisingly, no company is vocal about what SDGs they are impacting negatively. As if human and corporate activity had no negative impact on SDGs. I recommend companies to get a more balanced approach to this. Positive and negative, it makes the reporting more serious. Including the value chain of the equipment that is purchased often change the picture. Actually, maybe I should address this to the sustainability consultants that build this reporting for the companies? For an ESG analyst that work to understand ESG risks, the SDGs are not very useful so they cannot come alone.
ADVICE: Be transparent even when it does not look the best and tell us your plans to remediate this, also on the SDGs.
Sustainability KPI circus?
We see more KPIs, great! But many companies choose KPIs that suit them, they publish the good and talk less about the difficult areas. The latter can be sector typical or company specific. Please also, when there are international standards, do not invent your own. Industry organisations must be a good place to define common KPIs? I hope the increased focus on biodiversity will be accompanied with some good KPIs…
ADVICE: Give us standard KPIs (and more of them!)
Sustainability keyword density explosion?
If you have a sustainability report, you do not have to mention the word sustainability in every paragraph of your annual report or website. It reduces the weight of the core of your sustainability message, and we drown in words, some of them empty!
ADVICE: Give us concise standardised ESG relevant information
All into the sustainability scope!
In corporate sustainability reporting we see a lot of excuses for why this and that is not included (Scopes, waste, Code of conduct training, H&S KPIs, training in H&S, etc. the list is long);
- not the operating company (ok, only HQ, what is the point?);
- not associated companies (ok, if all are minority holders, nobody will report on it…);
and the big missing link in many sustainability reports;
- the supply chain (many companies have heavy plant equipment that seem to just land without either Environmental or Social impact in the production, or are these impacts too many kilometres away?)
An issue here is that only by reading fully the annual report, the website, the sustainability report, the green bond framework, the green bond external opinion, etc. you can have the full view. I dare say few investors really take the time to do this. Ouch, I know I may get slapped for saying this! We read all of this, it is our job, and we report findings to our investor clients.
ADVICE: Be explicit about the scope of integration (and preferably; include all relevant!)
Hiding game for sustainability factors?
I cannot believe that the BIOs of the Board of Director (BOD) members are secret. Or how many meetings the BOD had in the year and who attended. Or who are members in the different BOD committees. Or who is independent. Yes, I can confirm, many companies of a certain size do not publish this.
ADVICE: If you know it and it is relevant, publish it!
Stock exchange rules on sustainability publication – do we care? No
It does not matter what these rules are, consider them minimum requirements for admission to these exchanges. The same goes for national standards. If you as a company wish the external ESG analyst to come up with a “correct” ESG risk/opportunity assessment of your company, you should consider additional relevant information on Environmental, Social and Governance factors.
ADVICE: Stock exchange rules are targeting minimum levels, think of what ESG analysts and investors need to be convinced about your sustainability
If you say you are sustainable, prove it…
The same way as investors now with SFDR have to justify all they claim doing in detail, they also need this from you. For instance, if you prioritise waste reduction; we expect a policy, a programme (internal training) with KPI, a KPI of current status (with history) and a target. That is credible!
ADVICE: Justify what you claim with relevant details
The more you say about sustainability, the more demanding we become…
Yes, as an ESG analyst we take all you say seriously. At least if we find supporting elements in your reporting. Remember we do the research from the outside of your company, as an investor would do. We cannot guess what you have on the inside. And we prefer it that way. Why? It cautions our independency, and we feel commitment when you put it on print in public documents.
ADVICE: Do not claim more than you really can defend with public information, pretending can cost you a lot.
It was great to get this out!
Understand me right, the increased reporting is great and all in all we get more elements to better assess ESG risk and opportunities. But we actually prefer it to progress in a slightly slower pace with a higher quality, reading through company reporting nowadays gives a little feeling of Wild West in the sustainability pages!
We see many nice sustainability reports with good progress compared to last year, but we are puzzled how many weak points we still find in these. We are worried many investors never come to the detailed level to see this. As specialists, we see this, and it often ends up in weak ESG risk assessments (that the companies do not understand) and long engagement questions lists that we propose our clients (the investors) to discuss with the companies.
The end goal of this is to be reassured that you as a company have integrated sustainability in your strategy and that you implement this in a quality approach with all the required tools. Programmes (training), KPIs, etc. Then we become comfortable that you either are or are in process to become a sustainable company! Reporting is info, what counts in the end is action!
So dear Corporates – Do not FAIL the sustainability reporting – It is too important!
Corporates and sustainability consultants building sustainability reporting, if we cover your company or the company you work for, we can have a chat about what we see that can be improved! We’re of the few that actually read all you have published on sustainability, and we care! In a way we audit it and make a judgement of the remaining ESG risk.
If we do not cover the company yet, we can agree to change that as a start of what we are convinced would be a fruitful discussion.
ADVICE: Contact us at sustainAX!