“A wave of capital and focus" - ESG Disclosures and Investors

"A wave of capital and focus" is how Joe Gill, Director of Corporate Broking with Goodbody, described ESG in capital markets, particularly over the past 18 months to 2 years. Speaking at a free webinar this week run by Chartered Accountants Ireland and Goodbodys, Joe described the focus on the environment and social governance as creating opportunities and challenges for both investors and companies.

What is ESG?

ESG stands for 'Environmental, Social and Governance'. It is not new, but it has grown in importance, particuarly in 2020.

For many, ESG means climate change or corporate charitable donations. These are important parts of ESG, but the term also extends to issues like a company’s employment practices, talent development, the diversity of its board, and its business ethics. Because of this breadth, ESG disclosure is not always straightforward.

What is clear, though, is that climate change and other environmental, social and governance issues have never been more important to investors. ESG criteria are increasingly used by investors as a set of standards for a company’s operations to evaluate potential investments.

The Investor Influence

Investors are actively recognising climate risks and sustainability issues as key determinants of a company’s future value-creation potential, and see successful delivery of a business strategy as inextricably linked to that business’s non-financial performance.  

Therefore, companies looking to avail of capital must change how they embrace and disclose ESG issues. This often means re-evaluating their corporate strategies to include carbon-emissions reductions, enhance their corporate governance, and improve their sustainability disclosures. They must also be able to satisfy investors’ demands for analysis of the risks and opportunities presented by climate change and sustainability and deliver finance performance while making a positive contribution to society and the environment.

Disclosing ESG - the drive towards comparability

Accountants already play a key role in assessing and disclosing risk as part of corporate reporting, and will be equally important in disclosing sustainability-related risk and opportunities.  However, it is not always clear how to do so. There are various voluntary frameworks and standards in use for sustainability reporting – a veritable ‘alphabet soup’ of frameworks - but little standardisation, consistency or comparability, which are badly needed by investors. Preparers of ESG reports, such as accountants, can struggle to identify which reporting framework to use.

Investors have in part driven the agenda of creating a set of consistent and comparable standards for sustainability reporting and Chartered Accountants Ireland has lent its voice to this agenda.  In June of this year we responded to the consultation on the EU Non-Financial Reporting Directive, which lays down the rules on disclosure of non-financial and diversity information by large companies. We are currently in the process of responding to a consultation by the IFRS Foundation on a global approach to sustainability reporting. We are also participating with other entities, including the Global Accountants Alliance in making submissions to this consultation.

At the webinar ‘Environmental, social and governance disclosures: what do investors want’ we discussed the impact of investor requirements on sustainability reporting.

Partnering with Goodbody stockbrokers we heard from Ian Huggard, Senior Equity Sales specialist in Goodbody, who provided the institutional investors’ perspective. Two companies  – Kingspan Global Plc and Hibernia REIT – showcased their ESG reporting,  describing the financial benefits of effective ESG disclosure, where to start and how the approach of large corporates can be applied to companies all sizes. Joe Gill, Corporate Broking, Goodbody, moderated the event, following an Introduction by Barry Demspey, CEO of Chartered Accountants Ireland. 

This event is one of a series held by Chartered Accountants Ireland in 2020 on the topic of sustainability.  We recently launched a Sustainability Hub, available in our online Knowledge Centre, which provides information, guidance and supports to help members understand sustainability and give them the tools to take the steps they need to take. In 2021 we will be bringing members a series of events on sustainability, and will keep members updated on progress in the consolidation of global reporting frameworks.