How to approach ESG integration

Our Reporting Matters 8 research reveals the findings of our research on ESG integration disclosure in the largest 40 companies by market capitalisation in the FTSE 250.

To understand how well companies are integrating and reporting on ESG, Luminous’ Strategy & Insight team analysed the stewardship reports of the largest 20 institutional investors to understand the cut-across themes.

ESG is no longer confined to a dedicated ESG section but is increasingly integrated into all key sections of the Annual Report.

In particular, the rising awareness of climate-related risk, driven at least partly by the introduction of mandatory TCFD reporting, is reflected in the strong representation of ESG in risk management, where climate change is increasingly discussed no longer as an emerging risk but as a principal one.

Therefore, in terms of best practice, our research found a key indicator of a company’s ESG commitment involves it having ESG-related discussions integrated throughout its Annual Report.

What we found most disappointing is the low score we uncovered for ESG as a reason to invest, possibly exacerbated by the decision by a number of companies in our sample to not include an investment case in their Annual Report at all – a puzzling choice given that investors look to both financial and non-financial performance as indicators for the long-term attractiveness of investee companies.

Our findings

In the context of our ‘Reporting Matters 8’ study, our key findings are as follows:

1. Companies increasingly link ESG not just to their strategy (16%), business model (14%) and KPIs (15%), but also to executive remuneration (16%), demonstrating that they are taking the issue seriously
2. The relatively low rates of ESG integration into purpose (11%) and investment case (8%) suggest that companies struggle to identify ESG-related opportunities
3. The strong showing of ESG in risk management (20%) seems to confirm that ESG is viewed predominantly through a risk lens
4. Some companies still don’t have any non-financial KPIs

Our recommendations

• Demonstrate the link between your purpose and strategy to non-financial considerations
• Consider ESG-related risks but also opportunities
• Track your progress using non-financial performance to executive remuneration
• Link non-financial performance to executive remuneration

At our launch event on 20 July, Luminous’ Stephen Butler, Investor Engagement & ESG Disclosure Director, Rachel Madan, Sustainability & Impact Director, and Nina Kefer, Senior Consultant, along with Claudia Chapman, Head of Stewardship at the FRC, and Lindsey Stewart, Director, Investment Stewardship Research, shared the outcomes of our Reporting Matters research. They also offered practical advice on defining, reporting and engaging around ESG strategy, as well as how to integrate ESG in your Annual Report.

If you would like to access the recording and slides from our event, please get in touch.

Stephen.Butler@Luminous.co.uk