How to align ESG with an annual report
Given the importance and prevalence of environmental, social and governance (ESG) issues in modern business, aligning these topics with an annul report is one of the most important things a corporate can do. But where should corporates start? Stephen Butler, director of investor engagement and ESG at Luminous, the agency behind Britvic winning the best integration of ESG into an annual report at the Strategic Comms Awards offers a route through the maze.
‘If the corporate website is the face of the company, the annual report is the voice,’ says Butler, pithily summing up why ESG matters. ‘With both investors and wider stakeholders increasingly placing responsibility alongside profit when assessing business viability, the annual report has become an essential tool for companies to portray both their material and more arcane ESG aspects.’
Crucially, companies that effectively convey business resilience and transition readiness through their annual report are more likely to attract investors who view ESG as a source of alpha, says Butler. ‘At the same time, the inclusion of ESG in annual reports allows companies to engage with more sustainability-minded stakeholders who may prioritise purpose over profit.’
So how should corporates address and align ESG – particularly in their annual report? ‘Pace yourself,’ advises Butler. ‘ESG reporting is not perfect and still lacks a standardised reporting framework; seek to maintain a positive reporting momentum rather than attempt to meet all expectations at once.’
Here Butler also highlights the importance of double materiality: the concept that describes how corporate information can be significant both for a company’s financial value, and its impact on the wider world related to ESG, particularly the environment and social parts.
In light of the global focus on creating a sustainable future it would be advantageous to see annual reports incorporating more forward-looking ESG themes and disclosures
‘We often see companies failing to undertake double materiality assessments to identify ESG issues that are material to their business,’ he says. For example, he cites the recent Luminous Reporting Matters study which found that just 55 per cent of the FTSE 250 identify climate-related issues as material, with the other 45 per cent having not even carried out materiality assessments. These numbers highlight the corporate world has some gaps to fill when addressing ESG issues.
‘Given the heterogenous ocean of ESG metrics and sustainability issues, understanding which are actually material to your company is a wise first step to managing reporting expectations,’ explains Butler. ‘Thereafter, recognising which ESG attributes are material to your company through materiality assessments and alignment to the Sustainability Accounting Standards Boards ‘financially material’ standards creates a valuable foundation on which to build ESG alignment and ensure you are communicating on what matters.’
Butler identifies the biggest mistakes he sees corporates making when it comes to addressing ESG from an annual report perspective. ‘One of the biggest mistakes we see corporates making is falling victim to ESG-related risks tunnel vision.’
Butler cites fascinating numbers to support this. Of the largest 40 companies in the FTSE 250 there is strong showing of ESG in risk management (20 per cent) but relatively low rates of ESG integration into purpose (11 per cent) and investment case (eight per cent).
‘This seems to confirm the idea that ESG is still being viewed predominantly through a risk lens despite increasing reference to the value it creates for stakeholders and the environment,’ he says. ‘Considering that investors look to both financial and non-financial performance as indicators for the long‑term attractiveness of investee companies, it is a mistake for companies to not be reporting on ESG-related opportunities alongside risks.’
Butler then offers wider observations on corporates undertaking forward-looking ESG issues in their annual reports. ‘In light of the global focus on creating a sustainable future it would be advantageous to see annual reports incorporating more forward-looking ESG themes and disclosures,’ he says. ‘While we understand that historical commentaries and analysis are easier and safer due to the uncertainty of the future, the inclusion of future-oriented disclosures would enhance stakeholders’ ability to distinguish transition leaders from laggards.’
He concludes: ‘As companies face growing pressure from shareholders driving climate transition through engagements and proposals, namely a say-on-climate, it will soon become riskier to not include future-focused ESG alignment into an annual report.’