Published: 27 Mar 2023 · Last updated: 27 Mar 2023
As more and more firms become subject to Environmental, Social, and Governance (ESG) regulations, fund managers are on the look-out for better ways to report on their ESG metrics. We know better than anyone that ESG reporting can sometimes feel like a chore and can take up a significant amount of time and resources. But effective ESG management is crucial to building a business that is fit for the future.
You should be spending time on improving your ESG processes and performance, not just reporting on your metrics.
If you're an investor, a financial consultant, a fund manager, or just someone showing initiative, KEY ESG can support your ESG management processes.
We have developed a comprehensive list of best practices to help you to optimise your ESG reporting strategy. Have a read and let us know if there's anything you'd add.
In a nutshell, ESG reporting is a type of corporate reporting that focuses on how a firm manages its environmental, social, and governance-related impacts. In other words, its non-financial performance.
These reports are made available to potential investors, stakeholders, and other interested parties. They include information about policies and practices related to climate change, human rights, labour standards, diversity, anti-corruption, and more.
How is this data used:
In recent years, governments and regulatory bodies have established strict rules and regulations with regard to ESG disclosures. As more rules become mandatory, ESG reporting becomes increasingly complex. We've written extensively on the Sustainable Finance Disclosure Regulation (SFDR), the UK's Sustainable Disclosure Requirements (SDR), the Task Force on Climate-Related Financial Disclosures (TCFD), and more. Head to our learning hub for further details on specific regulations and the ESG reports they require.
The E in ESG pertains to a company's environmental impact and the ways in which is uses resources.
Energy efficiency is tracked, along with carbon emissions, and waste management. The firm's impact on biodiversity, water and air quality, deforestation, and climate change more broadly are also environmental considerations. Environmental metrics can be influenced by both internal and external influences. See our blogs on Scope 1 and 2 emissions versus Scope 3 emissions for further details.
Social elements are attributes that reveal how a company treats people - both its staff and its overall community.
Social factors include the company's stance on diversity, equity, and inclusion (DE&I or DEI). Its employee support systems, data protection and privacy rules, human rights policy, and customer satisfaction levels are also key considerations.
A firm's governance relates to the internal systems that allow it to function effectively.
Governance metrics advocate for transparency. They are shaped by the firm's board composition, its leadership team, its internal reporting systems for violations such as corruption, and its management structure.
A number of studies have found that companies with better ESG performance demonstrate higher returns on investments. They are also exposed to less risk during times of great turbulence, as they are better equipped to adapt.
But how can you leverage ESG information to help you prepare for the future? How can you compare your data and use it to build an ESG plan?
There's a lot that goes into ESG management.
Our team have looked at the global reporting initiative, and we've listed four key considerations to guide your decisions when implementing an ESG strategy.
Reporting on ESG metrics is all well and good. But to be able to fully commit to your goals, you need to set out a formal policy. Make sure the policy is aligned with your firm's culture and ethos. Tailor it to your objectives and goals, and ensure that each employee and stakeholder is on board. Make sure that everyone working for you or with you has access to this policy document.
The policy should identify the company's ESG goals, its principles and objectives, and the processes and procedures that should be used to achieve them. The specific performance metrics used to measure progress and demonstrate accountability should be outlined to ensure that the right data is being gathered.
Top Tip for creating an ESG policy:
Remember that your formal ESG policy can change. It's not the be all and end all. Reporting frameworks, disclosure requirements, and industry or market circumstances can shift rapidly. Your policy should move with the times and grow with your firm. Don't be afraid to make amends or add new metrics.
If you manage your ESG metrics well, and you track your disclosures properly, you'll begin to see positive changes quite quickly. However, your hard work is nullified if you work with a supplier that shows a blatant disregard for the climate, sustainability, and responsible management.
Integrate ESG criteria into the selection and management of suppliers, contractors, and partners. This not only allows your firm to uphold its core values, but it also serves to establish more sustainable partnerships.
Firms that uphold their own ESG standards are proactive, innovative, and ready to adapt. They have taken the initiative to improve themselves. Ask yourself: do I want to work with a supplier or partner who is not interested in future proofing their business? Of course not. Firms who are proactive with ESG are usually proactive in other aspects of their business.
As global reporting initiatives begin to cover more and more bases, non-compliant partners will quickly be caught out. If you're working towards Net Zero, or you're offsetting your carbon emissions, companies making no effort to combat climate change will detract from your success.
Top tips for assessing collaborators' ESG metrics:
1. Include ESG criteria in your supplier selection process. This should include reviews of the supplier’s sustainability rating, practices, and policies.
2. Consider incorporating a clause into supplier contracts that requires the supplier to meet certain ESG criteria. You could set goals with regard to reducing emissions, using renewable energy, or improving working conditions.
3. Create a system to monitor and evaluate suppliers and contractors on their ESG performance. These protocols could involve setting targets and providing regular feedback.
4. Open up a dialogue with suppliers and contractors and discuss their ESG performance. Some organisations, such as non-profits, universities, and other firms with expertise in ESG, might be able to provide your firm with resources and guidance on ESG topics.
5. Consider what ESG data you might require from your suppliers in order to satisfy your own company’s ESG data disclosure needs. Ensure that you set up the right process to collect this data in a timely manner and in the right format.
Assess your stakeholders' needs. Whether it's your customer base or your investors, you need to be aware of the specific ESG metrics that concern your stakeholders.
Different industries will have different areas of focus. For example, HR firms may be more geared towards social and governance aspects of ESG, placing less emphasis on the environment and climate-related concerns. Understanding these concerns will allow you to tailor your strategy to the people that matter.
Top Tips for communicating with stakeholders:
Knowing what your stakeholders deem to be important allows you to ensure you're working to improve the metrics that they value. However, this communication goes both ways.
Make sure you're keeping your stakeholders up to date on your ESG reporting. Share your successes! Talk about the work you're doing and how it benefits your business and the community. Shout about your goals for the future. These actions aid your brand image and endear you to your audience. They demonstrate your conscientiousness and reveal your commitment towards being a force for good.
It doesn't matter how much data you're collecting across your investment portfolio. If it's not relevant or comparable, it's useless.
It's vital that all teams are on the same page when it comes to assessing and tracking ESG metrics. To make sure your data can be compared, check that:
Managing teams to ensure they keep up to date on their ESG reporting can be difficult for fund managers. It can sometimes feel like a full-time job. This can often mean you spend more time chasing data and making sure it's relevant than you do assessing your ESG and implementing changes.
Fortunately, there is another solution.
KEY ESG's intuitive software collates data, notifies managers when data inputs are required, ensures all metrics are recorded properly, and provides detailed feedback and insights on how to improve your firm's ESG performance.
By consolidating your ESG processes and storing all insights in one user-friendly interface, you can save yourself from endless email chains, complicated Excel spreadsheets, human error, and inefficient reporting systems. The time saved can be spent developing your portfolio, making improvements in line with software recommendations, and managing your fund.
If you'd like to learn more about how ESG software can improve your ESG reporting strategy, speak to a member of our team.
You can also arrange a free demo if you'd like to try it out for yourself!