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ESG Topics Dominate Disclosure Discussions As Institutions Signal Its Importance

 

This year’s wake-up call that ESG matters to large institutional investors has come across loud and clear. With 2017 being a watershed year with shareholder “wins” on climate-risk disclosure at high-profile companies in the oil and gas and utilities sectors, many issuers are getting the message that there’s nowhere to hide and now is the moment to get serious about ESG and climate-risk disclosure.

The BlackRocks, Vanguards, and State Streets of the world have been very clear that they want more and better disclosure from the companies in which they invest. In early September, for instance, Vanguard – which has more than $4.4 trillion in assets under management – publicized its recent voting record. Not only had Vanguard voted in favor of shareholder resolutions requesting more climate disclosures, but the investment management giant explicitly stated that going forward it intended to take more public positions on governance issues relating to climate risk and gender diversity.

For issuers, the work that lies ahead is monumental but the direction is unmistakable. What issuers need is a plan to address ESG and climate risks; in addition, they need to build internal controls so they can generate clearer and more informative reports on risks from climate change and ESG issues. Large institutions have said that this information is material, and so issuers need to place the same emphasis on climate risk and ESG data as they do on financial disclosures.

Steps to Take

Some companies are responding to this clarion call by launching a concerted effort to offer sustainability reports or to expand the information provided on ESG issues in the annual report or on a corporate website.

Other companies—which may have been treating ESG as a key driver of corporate performance for some time now—are continuing to pay close attention to what large institutional investors say they need in terms of information. Even companies that are providing strong ESG disclosures might decide to tweak how these types of information are being disclosed, placing ESG issues in a brighter spotlight or changing the location of ESG data to give it more visibility.

For all companies, though, the recent white paper by the Task Force on Climate-Related Financial Disclosures (TCFD) is a terrific resource.

TCFD lays out a framework to help issuers focus on four key thematic areas:

  1. Governance-- Disclose the organization’s governance around climate-related risks and opportunities.
  2. Strategy-- Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material.
  3. Risk Management-- Disclose how the organization identifies, assesses, and manages climate-related risks.
  4. Metrics and Targets-- Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

In its recent white paper, TCFD presents strong evidence for why adopting a new disclosure framework matters: "Shareholder proposals regarding climate change are on the rise, too. In the 2017 proxy season, shareholders submitted 69 proposals related to climate change, up from 63 in 2016, and 28 proposals were voted on, with average support of 32.6% of votes cast, compared with 24.2% in 2016. Proxy advisers Institutional Shareholder Services (ISS), an influential guide for many investors, recommended that shareholders vote in favor of 23 of the 28 proposals (82.1%) in 2017 and 27 of the 37 proposals (73.0%) voted on in 2016. The increase in support for ESG and Climate-risk disclosure is escalating as year over year more shareholder proposals are being brought forward.”

Understanding how rapidly the demands for ESG disclosure are changing, Donnelley Financial Solutions is also working hard to provide the information you need on how to strengthen your disclosures and communications.

Read our white paper “Preparing for Climate-Risk Disclosure: Practical Suggestions for Public Companies.”

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