More and more companies have begun to recognize that corporate responsibility and accountability matters, not only because of an increased focus on sustainability, but because of a demand for transparency from stakeholders including investors, customers, as well as employees. This accountability is manifested in the form of environmental, social and governance (ESG) analysis and reporting. When done well, it generates valuable insights for a company, while helping to create long-term value for stakeholders.
In this blog post, we take a closer look at why ESG reporting is more important than ever, highlighting why it goes beyond an annual general meeting (AGM) or proxy season.
Why More Companies Now Focus on ESG Reporting at AGMs
The number of ESG-related resolutions filed by investors and proxies in the United States hit an all-time high of 567 in 2022, up from a record 499 the previous year.1 In January 2023, the European Union finalized the Corporate Sustainability Reporting Directive (CSRD), introducing more detailed sustainability reporting requirements for EU companies, non-EU companies meeting certain thresholds for net turnover in the EU, and companies with securities listed on a regulated EU market.2
There are multiple reasons for increasing global regulations regarding ESG reporting, which is why companies are going beyond just compliance. The benefits offered by better reporting are many: from becoming an employer of choice, to lowering the cost of access to capital, attracting long-term shareholders, and building resilience. It may explain why an astounding 88% of institutional investors now see ESG issues as being of equal importance to operational and financial considerations.3
Addressing Anti-ESG Sentiment
Morningstar ESG equity strategist Kristoffer Inton sees the recent anti-ESG push in the U.S. as the extension of a broader political-cultural conflict: “Many of these thoughts, and even some of the bills, are written without a great understanding of sustainable investing. Any investor who ignores ESG risk, like any other risk, does so at their own peril.”4 In 2022, Morningstar’s proxy database tracked 43 anti-ESG proposals, pointing out that ESG isn’t on every investor's radar, and that there is a vocal minority actively opposed to any emphasis being placed on it. However, it is also pertinent to note that these proposals have received little support because they weren't relevant to shareholders.5
According to Lindsey Stewart, Director of Investment Stewardship Research at Morningstar, recent research shows that large asset managers have come out strongly in favor of measures seeking to improve diversity, equity, and inclusion at the board level, senior management and in the wider workforce. This includes those that haven't so far taken a particularly strong line on environmental issues such as climate or biodiversity. The view, at least from one top five U.S. asset manager, is that diversity of perspective and thought in the boardroom, in the management team and throughout the company leads to better long-term economic outcomes.6
Ultimately, being prepared is what matters when it comes to addressing this anti-ESG sentiment. Companies armed with quantifiable, verified data around the real financial, legal and reputational benefits of an ESG-focused approach, are better-equipped to handle this sentiment. Also, as industry players who have followed these issues for years point out, many anti-ESG filings are frivolous and filed with a sense of grievance, which shows in the results.7
When a company has a solid ESG strategy in place, it can address shareholder concerns while bringing the board into better alignment with investor expectations. Addressing investors' ESG concerns becomes easier with some of the following steps:
Increasing board members’ ESG competency: Building their knowledge and competency so they genuinely understand the financial impact of ESG risk, and can speak about ESG-related progress, performance and plans.
Proactively preparing for questions: Ensuring constant or regular access to the right subject matter experts can make a difference, along with clear briefing documents offering an in-depth understanding of a company's ESG platform.
Transparency about challenges: Recognising that ambitious targets aren't easy, but also that a candid overview of progress and insights into how a company is innovating can help.
Explaining contradictory activities: If a company is doing something contrary to its ESG targets, investors must be able to understand why.
Addressing Demands for Accountability with Transparency
ESG reporting is an ongoing exercise and dialogue with investors and shareholders. It shouldn’t be restricted to a company AGM or to proxy season alone. Successful companies engage investors by embracing investor activism, thinking ahead, communicating better, and using benchmarks. The best way to accomplish this dialogue is to first approach investors as partners with shared interests.8 While a proxy statement is a valuable tool for disclosing your ESG agenda, it is also important to cultivate more effective communication tools that help you share goals, successes, and meaningful metrics.
Companies should also always strive for transparency, making it easy for shareholders and others to access relevant information. One way companies can do this is by responding to ESG rating providers like Sustainalytics to put third-party validation behind their achievement, track progress, and compare performance to peers across industries. Transparency also helps when talking about successes because a lot of traditional stewardship takes place privately, making it hard to see what the results of that stewardship have been.9 Demands for accountability is only set to rise in the future, so effective corporate ESG analysis and reporting can help companies address tough questions and stakeholder concerns.
To learn how incorporating ESG into the agenda of your AGMs, as well as overall reporting strategy, can improve effectiveness, increase investor confidence, and provide measurable value, download our ebook, Meeting Investor Expectations Through Corporate ESG Reporting, Planning and AGMs.
References
9. Murdoch, A. "ESG engagement: How investors get their way at the AGM." Capital Monitor. May 3, 2022. https://capitalmonitor.ai/institution/investment-managers/esg-engagement-investor-wins/://capitalmonitor.ai/institution/investment-managers/esg-engagement-investor-wins/.
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