Best practice and insights from workshop on future ESG Rating Guideline

DIRF had the privilege to be invited by CSR Link to participate in four workshops which will result in an ESG Rating Guideline in about six months’ time. The topics discussed during the workshops included ‘This is how the C25 are performing the ESG rating’, ‘Optimizing data’, ‘Engage’ and ‘Investment efficacy’. Different stakeholder views were represented by Kirkbi, KommuneKredit, Maersk Group, Ørsted, Lønmodtagernes Dyrtidsfond, Hermes Equity, MP Pension and Capital Market Partners among others. The workshop goals were to share best practice insights and different views from issuers and investors and thus fair disclosure.

During the last session Hermes Asset Management and Royal Bank of Canada each gave their contributions and opinions on where ESG is right now in the investor environment, where is it heading and what can or should be done to get onboard this fast-moving development. There is no longer any doubt that ESG is moving into the mainstream. The rate of change is accelerating resulting in higher expectations from investors.

However, this demand for ESG disclosure is still not met by the corporates, and data is very limited especially among the small and mid-cap segment. Generally, the large companies are better at disclosure and thus reporting on all three areas, but ESG disclosures are consistently inconsistent, and the disparity between large and small companies is striking. If you turn to ratings for information, you get an imperfect picture. Still, expectations especially among long-term investors should be set as the views and preferences on ESG results are very fragmented. Also, the fact that more than 50 per cent of capital is passive makes it increasingly important for corporates, public and private, to engage in ESG to get the attention from systematic investors. The view was that companies get the shareholders they deserve!

What to do? Best practice advice

Companies should set the agenda and focus on material KPIs. It is your story – and if you do not provide the right and relevant data yourself, others are likely to provide it instead. And most importantly on best practice: Less is more! One fact sheet with qualitative, relative data and absolute numbers is a good start and consider where to bring your ESG reporting. Do not hide it on one of the last pages, it should be included in the management’s review as well. Not only in the annual report, but also in the quarterly reports and roadshow presentations. Create an interesting [equity] story in which the company revenues are mapped into the ESG reporting based on true consistency instead of just ticking boxes from various rating bureaus. The important thing for investor relations is to get ESG into the corporate comfort zone. It is essential to get acceptance from the C-suite and the board and to get it included in the company culture. It is alright to have a continued base of disagreement and not just consensus. ESG is the social license to operate – not just for large companies, but for all listed companies regardless of how your shareholder base is put together.

Discussion paper on ESG Scoring by RBC Global Asset Management