The Five Things Every Private Company Should Know
Private companies are not required to make specific Environment, Social and Governance (ESG) disclosures. Why, then, do so many of them dedicate substantial time and resources to these issues? And why is ESG important to investors?
Answer: it is the right thing to do as well as a good business move. Private company executives understand that ESG issues are critical to most companies’ future success, so they are making it a priority. In the world of private equity, sponsors are analyzing their portfolio companies’ ESG issues and having frank discussions with CEOs and CFOs. While the importance of ESG reporting is steadily gaining recognition, this topic has not been central to the financial workings, even within the enterprise risk management function. All of this is changing — even more so in the past year for public organizations as well.
Understanding why ESG is important begins with knowing how the relationship between the world of business and the world at large has changed over the years. Recently, more investors, consumers and stakeholders have taken an active interest in how their investments impact social and environmental issues. These people look for opportunities to support companies that align closely with their personal values and priorities. In doing so, they can rest easier knowing that their financial contributions are not being used in ways that are counter to their interests.
As a response to this, regulatory forces are also applying pressure to companies when it comes to ESG reporting. Regardless of whether these regulations are real or simply anticipated, many businesses have made a point to integrate these concerns into their strategies. Recent events have only served to strengthen and solidify their importance.
For example, one of the most important aspects of ESG — human capital management — got a boost this past year from the COVID-19 pandemic, which illuminated the importance of emphasizing employee development and training, compensation, benefits, health and safety, supply chain resilience, diversity, and corporate culture. Now, human capital management has become one ESG issue no company can ignore.
But it is much more than that. Experts believe that ESG data is critical to the success of an organization and something that smart investors should be taking note of. But this something this is difficult to aggregate, often incomplete, inconsistent and error prone, increasing the risk of poor and inadequate messaging to the market.
Further, with the newly appointed Climate and ESG Task Force in the Division of Enforcement, there will be an even closer look at ESG through the lens of the investor to ensure disclosure, compliance, and investment in this area. As these trends continue, private enterprises are eager to show transparency and get out in front of any mandates and legislation related to the growing demand from consumers and investors. In this new environment, it makes sense for companies to expect ESG to be a part of their operations for the foreseeable future. So, how do organizations (both private and public) get started? Here are five steps to consider:
- Identify and secure a partner: It is important to work with an experienced partner that knows and has a deep understanding of ESG reporting. They can assist in helping with identifying key benchmarks and what tools to use for measurement.
- Select material indicators and ratings. Familiarize yourself with the ESG criteria and reporting frameworks. Note that not all are the same (i.e., Value Reporting Foundation (VRF) Global Reporting Initiative (GRI), Task Force on Climate-Related Financial Disclosures (TCFD) and identify five to seven relevant material indicators to focus on, such as climate, labor, human capital, social inequality, sustainability, and so on.
- Analyze peer group review. Complete a peer review on what moves the needle with those that rater and rankers. The selections you make and how you define (and defend) your selections must differentiate you and your brand/organization.
- Develop key themes. Distill a complex ESG program down to three to five thematic tenets. This is much more than an abstract and should be backed-up with data of how and why with specific initiatives spotlighted.
- Content creation. Advisory team develops the narrative and marketing designed content-ready piece, to showcase datapoints as well, for submission.
ESG is worth making a priority. ESG reporting is evolving rapidly and growing in importance. Skillful and transparent management of these issues will improve your relationship with investors, clients, employees, and all stakeholders.