COMMENT The importance of ESG factors in measuring the effectiveness of a business is now readily understood and frequently commented upon. Public companies are required to consider their impact on all stakeholders, not just on their investors.
This was not always the case. Early financial reports focused on the names of the directors, the share capital, the numbers and the AGM date. It was possible to fit this all on two sides of A4 and still leave room for an address and a postage stamp.
Twenty-five years later, statements became increasingly informative giving more detail on the underlying activities and performance. At the same time, shareholders pushed for more information on directors’ interests and remuneration, leading to additional disclosures on corporate governance as well as the detail underlying the numbers, such as a group’s banking relationships.
Scroll forward another 20 years and our latest report runs to 250 pages, with over a third devoted to ESG directly, with a governance section and environmental and social impacts highlighted.
‘Must haves’
Over time, the focus on a business’s environmental impact has moved from a “nice to know” to a “must have”. In a world lurching towards climate change, companies are setting tough standards on reducing carbon emissions but there is still the risk of greenwashing. Consequently, environmental data collection has become more sophisticated and company policies more deeply scrutinised. Reported numbers are being explained not only in a corporate context, but also in the wider local and regional context as the UK and many other countries move to hit future net zero carbon targets. We welcome more analysis, and our approach and disclosures continually evolve in response to feedback and as our own commitments deepen, such as the publication of our net zero carbon pathway last year.
The social impact of a business is harder to quantify but stakeholders are interested to know how we work with our local communities, engage with our staff and how we can create value for the broader society. Although some of these aspects can be quantified financially, such as the level of donations or community investment, often surveys and third-party assurance reports are required. An example of the latter would be the socio-economic impact assessment we commissioned for our White Collar Factory development that was published last year, or our employee and occupier satisfaction surveys.
Businesses can no longer be considered in isolation from their impacts on either the environment or society: a truth that climate change and the global pandemic has reinforced.
However, where does the third part of this triumvirate governance sit, as here the focus is back on the internal workings of the business itself? Historically corporate governance was seen as a box-ticking exercise and rarely a focus of media headlines, unless some aspect became particularly controversial, such as shareholders voting against an AGM resolution or a large-scale failing in oversight leading to corporate failure.
Governance today
Governance is now so much more. The last five years have seen the introduction of an increasing number of environmental and social metrics such as mandatory non-financial performance reporting, carbon reporting, stakeholder disclosures (section 172(1) statements), modern slavery statements, and reporting on diversity and inclusion, to name but a few. The increased regulation is only set to continue, such as the inclusion of the new climate risk reporting (aligned to TCFD) requirements coming in from 2022. By incorporating these measures, shareholders and other stakeholders will influence management behaviour.
Our governance team expects to see such ESG measures increase as the board and our stakeholders become more focused on these aspects. Two years ago we established a responsible business committee to monitor our corporate governance, sustainability and stakeholder engagement. Three of our employees are fully participating members of the committee, bringing the employee voice directly into the boardroom.
It is through this focus on governance that management can be challenged and our stakeholders can help set the agenda
We find that proxy voting agencies are increasingly focused on ESG issues. Most of our larger investors have dedicated sustainability teams which have bespoke and sophisticated ways of measuring our ESG performance, and governance is very much part of that. For instance, we are finding enhanced expectations that ESG targets play a significant role in determining our executive directors’ remuneration. This interest goes beyond our shareholders to include our occupiers, suppliers, local communities and local government.
It is through this focus on governance that management can be challenged and our stakeholders can help set the agenda. They can help determine which are the most important issues, what are the most relevant structures and responses for the business.
Governance sits at the very heart of our business, as it reflects our culture and values. If this did not include our very important environmental and social objectives, along with our other strategic targets, then our business model would be incomplete. However, like our business model it is continually evolving to respond to the aims and objectives of all our stakeholders.
John Davies is head of sustainability and Emma Bester is deputy company secretary at Derwent London
