24 November 2023
At a time when sustainability has become a buzzword and investors are more discerning than ever, understanding the complex world of ESG (Environmental, Social, and Governance) data is crucial for companies aiming to thrive in the middle market.
Recently, the Financial Reporting Council (FRC) published a comprehensive report titled ‘ESG Data Distribution and Consumption,’ shedding light on how investors obtain and utilise ESG data, and outlining actionable steps for companies to facilitate this process.
Unravelling the ESG enigma: a closer look
ESG data, encompassing factors related to a company’s environmental impact, social responsibility, and governance practices, has become a cornerstone for careful investing. The FRC's report delves into three pivotal aspects of ESG data:
1. Motivation – why investors collect ESG data
Investors are driven by various factors when collecting ESG data. These include portfolio construction and company analysis, regulatory compliance, stewardship, and client reporting. Understanding these motivations helps companies tailor their ESG disclosures to meet investors’ needs effectively.
2. Method – how data is collected and prepared
Investors embark on a thorough journey of data collection, identifying direct and indirect sources before processing the information for their investment and stewardship teams. Almost all investors rely heavily on third party providers for their ESG data, as it is a more time-efficient process when covering a portfolio of multiple companies rather than sourcing the data themselves. However, they also use companies’ narrative reporting to understand companies’ ESG strategies and this underscores the importance of accurate and transparent reporting for companies.
3. Meaning – integrating ESG data into investment processes
Integrating ESG data meaningfully into investment strategies is essential. Investors seek a clear and interconnected narrative to back up the data. This emphasis on transparency is pivotal for companies aiming to establish credibility in the eyes of investors.
Recommendations: a path to responsible reporting
The FRC’s report offers actionable recommendations for companies looking to enhance their ESG reporting practices. These include:
1. Know your audience: Understanding your stakeholders is key. Tailor your disclosures to meet the specific needs and interests of your investors.
2. Focus on relevance: Highlight aspects of ESG that are directly relevant to your company’s operations and impact. Quality over quantity is the key to impactful reporting.
3. Craft a coherent narrative: Back up your data with a compelling narrative that connects with readers on an emotional level. A well-told story can make a lasting impression.
4. Clearly define the scope of your data: Transparency about what is included and what isn’t builds trust with investors.
5. Simplify and clarify: Keep your content simple, meaningful, and easy to understand. Complex jargon and complicated data can alienate readers.
6. Aim for comparability: Strive for consistency in data presentation. Comparability allows investors to assess your performance against industry benchmarks effectively.
Sustainability reporting: a glimpse ahead
Looking ahead, the International Sustainability Standards Board (ISSB) has paved the way for a standardised approach to sustainability reporting.
IFRS S1 ‘General Requirements for Disclosure of Sustainability-related Financial Information’ and IFRS S2 ‘Climate-related Disclosures’ are set to become the global baseline for reporting on both sustainability and climate-related risks and opportunities.
IFRS S2 introduces additional reporting requirements, emphasising industry-based disclosure topics, quantitative and qualitative information criteria, and a comprehensive approach to GHG emissions disclosure. IFRS S2 also includes details of a Scope 3 measurement framework to provide guidance for preparing Scope 3 emission disclosures and additional information about their planned use of carbon credits.
The Department for Business and Trade has announced its intention to incorporate the standards into UK Law by Summer 2024, with a planned implementation date of 1 January 2025 for the UK’s most significant companies.
How can RSM help?
Understanding and implementing the recommendations of the FRC will not only lead to improvements in companies’ ESG disclosures but also contribute significantly to a more sustainable and responsible global economy. We are here to assist in paving the way for ESG disclosures that are relevant, reliable, and useful.
Our experts continue to stay abreast of the current developments. In addition to our insight articles, you can discover more through our dedicated narrative reporting and ESG commentary and guidance.
For more information, please get in touch with Danielle Stewart OBE, or your usual RSM contact, to discuss your ESG needs.