ESG regulations are maturing — your disclosures should too

Even as we all attempt to slow down during the summer months, we can feel the pace of change speeding up for companies that are making ESG disclosure decisions. Raters, rankers, investors and regulators are continuing to scour corporate disclosures for decision-useful information, credible data and evidence of strong management of material issues. So, we took some time late last month to connect with our friends at MSCI, a global provider of analysis and research, to discuss what they are observing and what resources they are providing for their issuer audience and beyond.

As a provider of portfolio analysis and near constant-contact with the investor community, MSCI provides market intelligence and supports corporate issuers that receive ESG ratings. Our conversation provided thoughtful insight about how companies can improve disclosure in an increasingly complex and regulated environment. Here are a few key takeaways that corporate communicators can keep in mind during the upcoming reporting cycle to help investors and raters, such as MSCI, find the information to accurately assess your progress.

1. Raters and rankers are embracing the complexity of the moment.

   The methodologies of different raters and rankers have become increasingly multifaceted, leaning on artificial intelligence combined with human analysis assessing intersectional and sometimes even contradictory information about a company. In contrast with the way binary investment screens worked five to 10 years ago, which checked if a disclosure existed or not, companies can now add context, narrative, and nuance to communications.

   For example, while the existence of a human rights policy is binary, raters and rankers now look for additional evidence and context as to how the issue of human rights is integrated into everyday business operations, such as supply chain screening and management. During the webinar, the speakers emphasized that MSCI’s intent is to understand and identify companies that use leading operational practices based on a more fulsome picture of the company.

2. There is a shared emphasis on financial materiality among regulators and raters.

   The Corporate Sustainability Reporting Directive (CSRD), the new EU law that requires in-depth sustainability-related disclosures, is aligned with MSCI’s focus on financial materiality. Under CSRD, the process of double materiality requires that companies consider the effects that external events, like climate change, have on their bottom line, as well as the ways that a company and its value chain impact these issues in turn. As we explored in an earlier blog post, there are many benefits to thinking about materiality in this way.

   According to the speakers, investors are very much aware of and embracing the research showing that strong management of financially material ESG issues leads to stronger performance, as well as increased access to and cost of capital.

3. Stakeholders are looking for increased transparency — and companies are delivering.

   Another key takeaway from the webinar was confirmation that investors are seeking more disclosure, and companies are focused on meeting that demand. One primary example is climate change data. Users of the MSCI platform are actively going into their user portals to share voluntary feedback and data on climate including carbon emissions and credits. This makes sense in an era of increasing regulation in some jurisdictions; companies are wise to demonstrate their grasp of their current data since it will soon be required. Platforms like MSCI offer opportunities to own the message and manage more proactively.

4. Data quality and alignment are more important than volume of disclosure.

   Not all data or disclosure is created equal. Both the context and quality of data matter, too. If the data is relevant to the context and to the stated financial materiality of the issuer, it weighs more heavily than volume. According to MSCI, when a company discloses too much on a topic that is not financially material, it can muddy the waters in an already saturated communication environment. Counter to the company’s best interest, financially relevant data is then more difficult to find.

The more eyes on your sustainability communication, the more strategic you must be to both cut through the clutter and deliver quality information that stakeholders need. Despite the ever-evolving landscape, raters, rankers, regulators and investors alike are seeking evidence of the integration between your sustainability strategy and business strategy — and how effectively you’re managing key issues overall.