As the old adage goes, there are always two sides to every argument. This is certainly true of whether the reporting of environmental, social and governance (ESG) performance measures should be mandatory or indeed reported on at all. Most – though not all – objective commentators agree that companies should make investors aware of any issue that is material to a business’ value or risk.
This includes ESG factors even where uncertainty on the level of value or the value at risk they involve exists. Notwithstanding that these factors sometimes are – erroneously in our view – called “non-financial”, most agree they will have a material and ultimately financial impact.
Where there is a raging fight among the believers is on whether reporting of those issues should be mandatory or not.
Our view is straightforward. We believe some very selective measures should be reported on a mandatory basis using a common methodology. Why? In order to allow investors to make investment decisions based on the comparison of peer companies in a sector or country on important factors affecting the business.
However, we recognise putting this into practice is challenging as the material issues will necessarily differ by sector. We support initiatives to specify and standardise best practice disclosure by industry.
In addition, we expect companies to describe any other ESG factors that are material to their business on a comply-or-explain basis. The reason for making the latter selective is to avoid box-ticking and information overload and to encourage companies to have responsibility for explaining the value and risks in their respective businesses – including ESG factors – in an integrated way.
The benefits could be significant. If ESG risks are not properly reported, investment decisions will ignore them and the sustainability of the global economy will suffer as a result.