Please visit this URL to review a list of supported browsers.
Corporations and their stakeholders are increasingly focusing on ESG and sustainability issues, including how companies manage environmental, social and governance (ESG) risks and opportunities, and how those actions contribute to their ability to generate returns over the long term, retain and attract employees and customers, and thrive in their communities.
NYSE Sustainability Reporting Best Practices Best practices for navigating sustainability disclosure NYSE Board ServicesNYSE’s Board Services program is a complimentary service for NYSE listed companies looking to refresh their boards.
One sign of the heightened focus on ESG issues is the growth in support for the United Nations Principles for Responsible Investment (PRI). The PRI was launched at the New York Stock Exchange in 2006. It encourages signatories (asset owners, asset managers and service providers) to incorporate ESG factors into their investment decision making processes. Since the launch, the number of signatories globally has grown from less than 100 to over 3,000, representing assets under management of over $103 trillion. 1
The size of investment products claiming to consider ESG factors has also grown dramatically. 2 The Global Sustainable Investment Alliance (GSIA) estimates that at the end of 2018, assets invested using sustainability approaches totaled over $30 trillion, of which just over 50% was in public equity. 3 By the end of 2019, in the U.S. alone, sustainably-managed assets had grown to over $17 trillion – a 42% increase on the previous year. 4
Different types of sustainable investing 5
Other stakeholders, such as employees and customers, are also interested in companies’ sustainability performance and management of ESG risks and opportunities. Research suggests that suppliers and vendors are making purchasing decisions, employees are making decisions about where to work, and consumers are making decisions about what products to buy, based on the information provided about companies’ approaches to ESG.
A broad range of companies recognize the increased interest in sustainability and have already embedded relevant ESG considerations into their strategy, risk management, and governance, and many are already reporting on their ESG practices and progress. Many more are beginning this journey. As ESG investing becomes more mainstream, and stakeholders increasingly focus on ESG performance, more companies will benefit from demonstrating how they consider these issues.
The best practices below aim to help companies navigate the world of reporting and disclosure. They are not mandatory, nor intended to replace existing disclosure frameworks and standards. Rather, our aim is to facilitate companies moving forward on their ESG disclosure by:
The target audience for these best practices include those individuals in reporting organizations who are responsible for ESG governance and oversight, strategy and risk management, reporting, and communications with various stakeholders (including the investment community).
Just as financial reporting is not the end goal for the company, but a way of communicating the financial results of its various activities, sustainability reporting or ESG disclosure should be understood as a way of communicating how the company is managing ESG issues. The disclosure is an output and is aimed at meeting stakeholder demands for transparency and accountability. The process of reporting can also contribute to improving a company’s understanding of its own ESG risks and opportunities, creating a virtuous circle of improvement.
While these best practices are aimed primarily at the reporting/disclosure part of the ESG value chain, it touches upon other aspects that are relevant for high-quality reporting.
There is growing evidence that companies that effectively manage material ESG risks and opportunities are more resilient during times of volatility and uncertainty, and financially outperform their peers over the long run. 6 These benefits, together with increased regulatory focus on ESG issues (such as climate change), and the increase in investors incorporating relevant ESG issues into their investment decisions, means that management of and reporting on ESG issues that are tied to the company’s ability to create value is likely to rise in importance. 7
Before a company can begin to think about reporting on its ESG performance, it needs to determine which ESG issues are relevant to it and how these issues fit into its overall business strategy. Some companies conduct a formal assessment of these issues, either by external discussions with shareholders and other stakeholders, or internally by looking at ESG issues already on the board’s agenda or included in the company’s business plan or risk management program. Companies should be able to answer the question: how do the specific ESG issues that the company has chosen to focus on contribute to its short-term financial performance and/or long-term value creation?
Deforestation — a practical example:
In November 2020, the United Kingdom proposed new legislation banning the sale of commodities grown on land that had been illegally cleared. 8 Under the law, affected companies would incur the costs associated with compliance including (potentially) the need to restructure supply chains.
Importantly, concerns about deforestation are not new. These issues have been raised by environmental campaigners for decades and more recently moved up the regulatory and investor agenda, 9 driven by an understanding of the links between deforestation and climate change and the dangers posed by biodiversity loss. Companies that produce or purchase commodities (such as soy, beef, cocoa, palm oil) and are typically associated with deforestation may face regulatory changes, pressure from investors or other stakeholders. After evaluating these increased risks, some companies have introduced their own measures to enhance product traceability. Some may even have gone as far as to invest (where possible) in certification of commodities to provide greater assurance that these are not associated with unsustainable agricultural practices. These companies that are effectively managing deforestation risks will arguably have a competitive advantage over those that may be simply reacting to legislative changes - in this case, a link from an ESG lens to strategy can produce a directly measurable benefit.
Companies new to ESG reporting may wish to begin by examining what issues their peers are focused on - reviewing reporting and disclosures from both peers as well as companies upstream and downstream in the supply chain. Some companies may find they are already focusing on and managing relevant ESG issues because of existing regulatory requirements or an understanding of how these issues impact their performance, e.g. cybersecurity. For many organizations, there may be just a few topics that are of high importance.
Despite the attention that issues like climate change receive, there is a range of ESG issues that can contribute to company value creation or destruction. Some examples are set out below. More details can be found in leading disclosure standards and frameworks discussed later in this guidance.
Reporting is how your company communicates to your various stakeholders what it is doing. Whether your company is engaged in an active ESG program or not, reviewing your existing disclosures in the context of how peers communicate, including messaging in SEC filings and your proxy statement, is a worthwhile exercise. With each company’s reporting, watch for a) which issues the company is focused on, and b) how and why each company believes these are relevant. Many companies are doing great things with respect to their ESG strategy but do not get full credit for their efforts because they do not clearly or effectively communicate what they are doing in a manner digestible by stakeholders. A good reporting strategy will help ensure that your stakeholders acknowledge your company’s ESG efforts.
Interview + Podcast with Brian Matt on what investors really want.
There is a growing consensus that a company’s ability to generate shareholder returns over the long run is at least in part dependent on its relationships with key stakeholder groups -- e.g. customers, employees, suppliers and the communities in which you operate. More broadly, it also suggests a way of thinking about how those returns are generated – delivering value to customers, with due regard for the environment; fostering an inclusive and motivated workforce, dignity and respect in the workplace, fair and ethical treatment of suppliers, and support for and from the communities in which the company operates.
Identifying your key stakeholders: Deciding who your company’s stakeholders are is an important step in developing and implementing an ESG strategy. Some of your stakeholders will be obvious – such as investors, employees and customers. Others can be more challenging to identify. One commonly-used framework, the GRI Standards (see section 7 for further details), provide some guidance in this regard, suggesting: “Stakeholders are … entities or individuals that can reasonably be expected to be significantly affected by the reporting organization’s activities, products, or services; or whose actions can reasonably be expected to affect the ability of the organization to implement its strategies or achieve its objectives”. 10
Other stakeholders companies may consider:
These lists are not exhaustive, and each company should apply its unique perspective to determine who its most relevant stakeholders are.
Measuring current engagement: Once your stakeholders have been identified, the next step is to ensure the company has mechanisms in place for stakeholder engagement. One primary purpose of stakeholder engagement is to identify how stakeholders think about the company and its conduct as it relates to their interests. In addition, this engagement can help the company identify key ESG issues that are likely to impact your company’s performance directly or indirectly and to appropriately manage stakeholder expectations and concerns.
Your company may already conduct some level of proactive stakeholder engagement, which can help your company identify new opportunities and enable more effective risk management. It can also build trust. It may not be possible to keep all stakeholders happy all of the time, but if stakeholders feel their perspectives are considered and that they have avenues to raise concerns, then it may make trade-offs more palatable.
Tools for stakeholder engagement include:
The concepts of stakeholder identification and engagement are not new. For example, many companies, having identified employees and customers as key stakeholders, already do employee and/or customer satisfaction surveys. Applying an ESG lens to this inquiry may simply expand the scope of stakeholders that are considered and the nature of the conversations that are held.
Stakeholders and ESG reporting: Identifying the company’s key stakeholders allows the company to make informed decisions about what to report and where to report it, allowing you to present information in a way that is most relevant to each audience. Second, some users of ESG reporting are interested in understanding who your company thinks its key stakeholders are and how you are managing those stakeholder relationships. Finally, displaying how the company performs with respect to metrics relevant to these stakeholders can help build trust.
As the company progresses in the ESG process, it will likely seek to revisit its stakeholder engagement program periodically as it seeks to both communicate its approach to issues as well as listen for new emerging issues.
The concept of materiality is often used in an SEC reporting context to identify what information companies should disclose, and traditional definitions of materiality tend to focus on investors as the primary users of reported information. However, a similar concept of materiality might reasonably be applied to determining which ESG issues should be presented to a broader set of relevant stakeholders. In essence, materiality is a lens or filter that allows your company to determine the ESG issues on which your stakeholders focus. Of note, the Corporate Reporting Dialogue (CRD) suggests that ”(m)aterial information is that, which is reasonably capable of making a difference to the proper evaluation of the issue at hand.” 11 This perspective encompasses a range of stakeholders and is aligned with the idea of broad stakeholder accountability.
It is therefore important to decide how you define materiality for your purposes when reviewing the issues that are relevant for your ESG program. Some definitions focus solely on issues that are deemed to be financially material i.e. to focus on the ESG issues that impact your financial performance. Others also consider the impacts that your company has on society and the environment. Some use the term “double materiality” to describe the idea that companies consider both the ESG issues that impact your company as well as your company’s impact on society/the environment. Still others suggest this distinction is a moot argument as company value creation can only be understood in the context of its operating environment and the impacts it has.
Regardless of whether your company is focused solely on financial risk and opportunity or impact more broadly, the other key input to your materiality determination is the perspective of key stakeholders. As discussed in the previous section, your company’s stakeholders can have a significant impact on your ability to generate returns. Stakeholders also provide valuable insights to your company’s impacts (both positive and negative) which your management team may not be fully aware.
A materiality map or matrix is a useful tool for representing how your company has gone about evaluating and prioritizing the company’s salient issues. Typically conceived on a grid (e.g. importance to stakeholders, measured alongside importance to business success or importance to stakeholders and significance of environmental, social and economic impacts 12 ), it allows users to plot the topics according to their importance. It also provides insight into why the company has chosen specific issue areas on which to focus.
Note : this exercise is not intended to reflect whether your company believes an issue is important in general terms. Rather, it is aimed at assisting you in prioritizing among possible ESG issue areas and enabling you to focus on those that are most important, as well as an external signal to stakeholders on how your business applies its focus.
Some companies conduct this type of assessment on their own, while others may choose to work with a consultant. You may wish to refer to resources such as the SASB Materiality Map® to assist you in identifying potential issues for companies operating in the same sector. You should also keep in mind that what is material will change over time due to changes in your company itself (e.g. through an acquisition or launch of new product line), policy/regulatory changes and/or changes in stakeholder expectations – that it is “flexible, time-variant, and context-driven.” 13 The process of assessing the company’s key issues is an ongoing one, rather than something that is done at a single point in time.
