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Degrees of separation

ESG reporting: integrate or separate?

The current surge in interest in Environmental Social Governance (ESG) has seen it take centre stage. From millennial social media posts to the board room of globally listed businesses, to influencing investment decisions at financial institutions with trillions of dollars in Assets Under Management, corporate behaviour is under scrutiny more than ever. With this much at stake, across such a diverse stakeholder base, are businesses making the right decision in how they report on ESG?

By Nick Rose  | Director | Head of Reporting Communications

The mix-up
There is currently a very mixed approach to reporting on ESG issues. If there’s a recurring theme, it’s probably the uncertainty on how to do it. Some businesses even misrepresent ESG for what used to be known as corporate social responsibility.

When the International Integrated Reporting Council’s (IIRC) framework to reporting first came to prominence six years ago, most reporters incorrectly believed this was purely a call to arms to bring CSR into the main annual report. The truth is, that’s but a small part of a much grander vision.

The IIRC’s vision of integrated annual reporting is to explain to an organisation’s diverse stakeholders how value is created over time. This is achieved by demonstrating that financial performance can only be fully understood when viewed as the combined outcome of business strategy, business model, risk management, company culture and remuneration policy.

There’s bad integration …
The onset of integrated reporting combined with ongoing regulatory changes has encouraged the increased disclosure of off-balance sheet items, in addition to the statutory financial performance. This has resulted in a 60% increase over the past 10 years in the number of pages that make up the ‘front-end’ corporate narrative of an annual report.

As a result, the current trend is to limit ESG commentary to areas where it resonates most with the investor audience - such as the business model and strategic commentary, but less so in the operational review.

However, there is increasingly demand for greater disclosure of ESG initiatives, where investors are looking for greater data detail against an increasing number of global frameworks like the PRI, TCFD, GRI and the SDGs, to name but a few. 

… and good separation
Every company is different. For each, the best approach to integrated reporting should simply reflect how and where they perceive ESG materially impacting the business objectives.

Our perspective at FHF, informed by client and sustainability analyst feedback, is that the reporting format should cater for investor demand. Clients who currently do not produce a separate ESG report are having to continually be reactive to queries, especially when pushed on key ESG issues by the ratings agencies, particularly MSCI. By and large investors are demanding integration of top line ESG reporting in the AR, and greater ESG disclosure separately.

And in the end
So, integration or separation? The answer is both. No matter the size of your business, or how small you believe your investor audience to be, your annual report should demonstrate how ESG concerns are integral to your core business strategy. But wider ESG data is not just gaining in popularity as a nice to have, it is becoming fundamental to key investment decisions.