Providing Timely ESG Information Is Becoming More Crucial for CFOs

Providing frequent updates about the sustainability of their business is becoming more crucial for finance chiefs, as analysts and investors increasingly rely on this information when evaluating a company’s outlook and its creditworthiness.

Source: WSJ | Published on February 11, 2021

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There aren’t yet sweeping global regulatory frameworks that force swaths of companies to report their performance in terms of environmental, social and governance, though certain exchanges and governments are making ESG disclosures mandatory. But even without widespread regulation, there is an incentive for executives to disclose this data.

Financial analysts these days often consider companies’ ESG performance when recommending whether to buy or sell a stock. Citigroup Inc., for example, last year published hundreds of stock notes citing ESG factors as reasons for changes in ratings or target prices.

Larry Fink, chief executive of BlackRock Inc.—the money manager with some $8 trillion under management—in January asked executives to ramp up their disclosures. “I urge companies to move quickly to issue them rather than waiting for regulators,” Mr. Fink said in his annual letter to company leaders.

Asset-managers need frequent data updates from companies to inform real-time investment decisions, said Rick Redding, chief executive officer of the Index Industry Association representing index providers. Lenders are also taking a closer look at sustainability metrics when they provide loans to companies or underwrite their bonds.

As a result, companies across sectors are disclosing more insights into their ESG performance than ever before, according to The Wall Street Journal’s latest sustainability ranking for the quarter ended Dec. 31. At the end of last year, the number of businesses meeting the Journal’s minimum disclosure requirements last year jumped to 5,379 companies, up 23% since 2017.

The Journal’s methodology assesses how companies handle ESG issues and create value for shareholders over the long term. It is based on material data inputs covering 26 categories relevant to certain industries, according to the Sustainability Accounting Standards Board, a nonprofit that helps investors and companies create reporting frameworks.

Not reporting sustainability data in a timely fashion can affect companies’ position in the Journal’s ranking. Apple Inc. was among 31 companies out of 100 that were dropped from the list in part due to the lack of updates to some of their ESG data.

Apple Inc., which made it to No. 68 in the Journal’s previous sustainability ranking in October, wasn’t included in the year-end issue due to outdated information on diversity and inclusion. The company’s most recent publicly available information on these two topics at the end of December was over two years old, dating back to Dec. 16, 2018. The Journal requires companies to provide at least 20 financially material data points that are less than two years old to be considered for the ranking. Apple didn’t respond to requests for comment.

To get around lagging disclosures, some investors are turning to algorithms that track company mentions in news articles. Eiffage SA, a French engineering and construction company, moved up in the Journal’s latest ranking to No. 23 partly due to an electric vehicle deal with Volvo AB. The transaction with the auto manufacturer received significant press coverage and boosted Eiffage’s environmental score. Eiffage provided other ESG metrics, too.

Standard Bank Group Ltd. , a South African banking group, entered the ranking at No. 40 following news coverage about a new educational endowment and affordable housing projects. Its ESG disclosures also contributed to its position in the ranking.

Disclosures on these issues help investors identify the right targets, said Steve Norcini, senior equity portfolio manager at investment firm Wilmington Trust Investment Advisors Inc.

“These are important metrics that investors need to have to assess the value and quality of the company,” he said. “And to the extent that they’re not reporting it, they’re falling down on the job.”