London Stock Exchange Group Issues ESG Reporting Guidance

Investors desire a standard approach on how companies report their environmental, social and governance practices.

The London Stock Exchange Group has come out with guidance on how companies should report on their environmental, social and governance (ESG) investment practices. This comes about as investors are more interested in a standard approach to how companies report on such matters. The guidance will prompt companies on what sorts of information investors are looking for regarding their ESG investments.

Martin Skancke, board chair for the Principles for Responsible Investment said, “Institutional investors need investment-grade ESG data to accurately inform their decision making and asset allocation. Exchange operators have a major role to play in supporting enhanced data disclosure, so we commend the London Stock Exchange Group for their leadership towards improving dialogue and ESG data flows across the investment chain, and call on other exchange groups to follow suit.”

The LSEG guidance focuses on eight priorities for companies in their ESG reporting practices:

  • The relevance of ESG factors, such as climate change implications, to a company’s strategy and how it plans to benefit from or reduce the impacts of such factors
  • A clear explanation from companies on what the impact will be of ESG factors on their businesses, and how such factors could impact financial performance
  • ESG data that companies provide should be clear, consistent and based on global standards
  • There are a variety of standards for ESG reporting and the ones that investors are more interested in include standards put forth by the Global Reporting Initiative and the UN Global Compact, among others
  • The outlet for ESG reporting could include a company’s annual report or a stand-alone report, but the disclosures should be relevant for investors
  • How to deal with global regulations as companies prepare their ESG reports
  • How to communicate on a company’s exposure to green products and services
  • The ESG disclosure standards for a company looking to raise debt financing

LSEG hopes this ESG reporting guidance initiative will make companies more attuned to providing good quality ESG input to investors, besides inducing interest in innovative sustainability investments, leading to standardization on global reporting and providing investors with adequate input to make informed decisions.

LSEG has based its guidance on previously issued standards reports from the Financial Stability Board’s taskforce on “climate-related financial disclosures” and the United Nations’ sustainable development goals.

To put together the guidance, the LSEG obtained input from various listed companies of different sizes. The company also received feedback from investors and asset managers about the challenges they face in reporting on their ESG practices. According to the Global Sustainable Investment Alliance, more than one-third of institutionally managed investments globally, accounting for north of $20 trillion of assets managed, incorporate an ESG approach to management. 

Although ESG investing is on the rise, PWC’s 2016 ESG pulse report finds that while investors are looking for ESG information they can understand, “there is work to be done to bridge the gap between what investors want and what companies are providing.”

For instance, although 81 percent of S&P 500 companies made ESG disclosures in 2015, PWC finds, most of these companies aren’t making disclosures in a format that would facilitate comparisons of companies by investors. Moreover, only 29 percent of investors reported being confident about the quality of the ESG input companies give them.

By Poonkulali Thangavelu