Actively-managed investors evaluate risks and opportunities before selecting stocks to add to their portfolios. Indexed or "passive" investors, who have been increasingly in size over the past decade, may not have the same opportunity as active managers to "pick and choose" which companies they will own, but once they find them owning them, they are keenly interested in understanding the risks and opportunities facing those companies, and are eager to eager to engage their portfolio companies on these issues in the course of their ongoing "stewardship" efforts.
In both cases, investors want to understand the risks and opportunities each company faces, as well as how these are overseen, in particular at the board level. The number and breadth of potential risk issues has been broadening, and the recent pandemic has highlighted both the importance of focusing on ESG related risks – and the need for effective oversight if they are to be managed appropriately.
The importance of ESG disclosures to companies cannot be overstated. Here are some points to consider:
- Investors pay close attention to ESG disclosures when choosing where to invest their money. In addition, there are legal implications and ESG disclosure regulations related to the SFDR in the E.U. and the SEC in the United States.
- ESG can have a significant impact on a company's image in the marketplace. Global and domestic investors also take it into consideration.
- Risk disclosures that adhere to ESG disclosure requirements can have a strong influence over a company's future success.
- Although mandatory ESG disclosures are not yet standard for all business entities, voluntary disclosures are still a good idea because of the many positives they can bring for corporations and other enterprises.
In this article, we discuss trends in disclosure of board risk oversight, both of "traditional" risks, and of the additional factors considered under the ESG umbrella.