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The ESG reporting battle - Mandatory vs Voluntary

Home / Hermes EOS Blog / The ESG reporting battle – Mandatory vs Voluntary

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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.

For that reason, we at Hermes EOS are actively participating in a number of initiatives. These includeIntegrated Reporting, Sustainable Stock Exchanges and the Group of Friends of Paragraph 47.

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.

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Leon Kamhi – Head of Responsibility at Hermes investment Management Reporting into Hermes Investment Management’s CEO, Leon Kamhi is responsible for developing and directing the programme for integrating responsibility across the Hermes group, overseeing its delivery and accountable for its success. This includes ensuring investment teams are aware of and integrate ESG performance in investment decisions and that engagement is effectively incorporated alongside investment activities. In addition, in this role he oversees and contributes to how the firm’s responsibility activities and performance are integrated into Hermes’ client relationship management and reporting, the delivery of its corporate citizenship programme and the development of responsible structures and processes for the firm. He also leads a number of corporate and public policy engagements. Previously at Hermes, Leon was responsible for the development and delivery of Hermes EOS’ global corporate and public policy engagement programme from 2012-2016 and acted as its commercial director from 2009-2012. Prior to that, Leon worked within the Hermes UK Large Cap Focus Fund for seven years, where he was responsible for executing the fund’s engagement programmes. He also has 12 years of strategy consulting and operational industry experience.
Read all articles by Leon Kamhi – Head of Responsibility at Hermes investment Management

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