London Stock Exchange Group publishes new ESG guidance

10 February 2017

Yesterday, February 9th, the London Stock Exchange Group (LSEG) published guidance on sustainability (they use the term ‘ESG’, or environmental, social and governance) reporting titled ‘revealing the full picture’, which will be sent out to more than 2,700 listed companies. It’s an initiative that I’ve been closely involved with, having worked alongside LSEG on the guidance for much of last year.

Is this an important development?

We think that it is. This is the first time that LSEG has encouraged companies to produce more and better sustainability reporting, and the fact that they have stepped in says something about the scale of the mismatch between what investors want and the kind of information that’s out there.

Who does this guidance apply to?

Companies across all sectors with an equity listing, from the FTSE 100 through to small cap and AIM firms. LSEG’s view is that demonstrating long-term sustainability and readiness for the coming low-carbon economy is relevant for all companies, even when historically they may have offered very little sustainability information. Private companies, who perhaps issue only bonds on the markets, would also benefit. Ultimately, the hope is that this guidance will help to lift all boats.

Is compliance with the guidance mandatory?

No. But the expectation for companies to be managing these issues is intensifying.

Is there a deadline by which companies should address the guidance?

There is no specific deadline, but the launch of the guidance will increase investors’ focus on sustainability matters so it is in all companies’ interests to prioritise this.

Why is LSEG getting involved in this already crowded space?

Increasingly, investors of all stripes are demanding access to high-quality sustainability information, but find existing disclosure wanting; the 2013 and 2016 amendments to the Companies Act (and similar requirements elsewhere) aren’t seen as going far enough, and the various frameworks (e.g. GRI, CDP, UNGC, IIRC) can be confusing. Meanwhile, many companies are unsure as to whether they are providing enough, or the right kind of, information. LSEG see themselves as well-positioned to help, given that they deal directly with both listed companies and investors (through FTSE Russell).

Is this just another thing to add to the long list of existing sustainability frameworks?

LSEG say not. Their view is that in most cases, companies must pick the most applicable elements (e.g. an approach to materiality, KPIs) from the most widely-used frameworks. They do strongly endorse alignment with the UN’s Sustainable Development Goals, given that these could soon provide a useful, internationally-recognised framework that shapes business priorities and reporting. That day is some way off, however. In the meantime, they recommend that reporters look to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which constitute a concrete list of recommended disclosures that can be extended to non-climate areas of sustainability fairly easily.

Why is the guidance being published now?

Because sustainability is now something investors, of all shapes and sizes, based in the UK and elsewhere, take very seriously. They will routinely look at information on ESG performance alongside financial and strategic information in order to better judge a company’s future prospects, and will often draw conclusions about management quality from performance on things like resource use, human rights, health and safety, corruption and transparency.

What is the evidence that investors really make decisions based on sustainability information?

LSEG notes that of the largest 10 asset owners in the world, seven incorporate sustainability in some way into their benchmarks. Look to the open letter penned last year by Larry Fink, CEO of BlackRock, for evidence of a new tone among mainstream investors. At the launch event for the guidance, Steve Waygood, head of Responsible Investment at Aviva Investors, noted that they frequently challenge their traders on the sustainability risks in their portfolios, and that they will vote against the report and accounts at the AGM if material sustainability information isn’t offered. It was also noted that many mainstream investors are quietly re-allocating capital away from poor sustainability performers, and in some cases companies may not be aware that this is happening.

Does this mean we have to produce a standalone sustainability report?

Not necessarily, but it may well be the right option for many firms. In the guidance, it is made clear that it is possible to do a good job by bolstering your existing annual report, offering a standalone sustainability report, or improving disclosure in an integrated report. It is made clear, however, that print and PDF reports aren’t enough: investors and their advisors want access to raw data online, so that they can investigate underlying assumptions, try to compare like-with-like in a sector, and plot movement over time.

Is this anything to do with FTSE4Good?

FTSE4Good is an index series, launched 15 years ago by LSEG, that elevates and ranks companies who perform well against various sustainability metrics. The new guidance discusses the underlying FTSE4Good methodology in the context of helping readers to identify their companies’ material issues. It seems clear that following the guidance would be a fast-track route to appearing in the FTSE4Good indices.

What are the key topics covered by the guidance?

The guidance is a fairly lengthy – but worthwhile – read. The topics covered within its 60 pages include:

– Integration of sustainability with strategy and business models

The guidance argues that it’s not enough to provide data without explaining how certain sustainability issues are relevant to your business model and strategy, in terms of the attendant risks and/or opportunities.

– Material disclosure

‘Material’ – a word for which there are many definitions, but here means ‘important enough to factor into a long-term investment decision’ – disclosure is very important. LSEG make clear that this isn’t about ‘one size fits all’, it’s about offering investors more of what they want specifically from your company.

– ‘Investment-grade’ data

One of the big problems at the moment is that firms publish sustainability reports and data, but do so in a way that would never pass muster for the financials – data must be credible, balanced, timely and easy to locate.

– Reporting as a complement to dialogue

Although reporting and publishing data is important, the guidance emphasises that it’s critical for companies to engage with investors, and respond to what they are asking for.

– ‘Green revenue’ reporting

Many investors want to understand companies’ levels of exposure to green products and services. However, there isn’t much information available at the moment, because typically underlying reporting segments are too broad to allow investors to identify which revenues are ‘green’.

What’s next?

Following yesterday’s launch event, LSEG are preparing a major publicity push for the guidance, and investors will no doubt find it to be a useful discussion point when they’re talking with companies. Firms that are aware that they may be behind the curve should now look closely at the key points made in the guidance, and then at how they might best respond in a practical way.

At Friend, we are proud to help companies of all shapes and sizes (including FTSE 100 leaders Marks & Spencer and Pearson) with their sustainability, integrated and annual reporting. If you are thinking about your sustainability disclosure in light of this new guidance, we would love to hear from you.

Nicholas White
Head of Reporting