Having an effective and credible environmental, social and
governance (ESG) story has moved past the “nice-to-have” stage and has arguably
become a near necessity. Companies lagging their peers in this area
increasingly face a wealth of challenges, from finding themselves subject to
intense engagement focus by a growing range of investors to being penalized
through lower demand for their stock and higher costs of capital—as well as
becoming easy targets for activists.
Clients have often cited two main obstacles to commencing
their ESG and disclosure journeys:
The past year has seen significant movement toward
consolidation or harmonization of the reporting standards (with more changes
certain to come). In addition, in March 2022, the SEC released proposed rules
about climate-related disclosures, eliminating some of the uncertainty about
the direction regulators plan to take.
Companies are responding to this clearer ESG landscape by
issuing more inaugural and follow-on ESG and sustainability reports and by
discussing these topics in traditional financial reports (including proxies and
10-K/annual reports), as well. Cutting-edge reports are increasingly aligned
with the leading reporting standards, such as SASB, TCFD, GRI and the GHG
protocol. That said, even as companies are upping their game, investors have a
seemingly insatiable demand for more and higher-quality reporting.
As part of this disclosure trend, companies are discussing
their material ESG risks and opportunities, with many publicizing their goals
or targets for the future. ESG elements have now become part of the overall
corporate strategy and increasingly are reflected in compensation program
incentives and metrics.
Particularly for newly adopted pay elements—as with other
parts of compensation storytelling—it is important to go beyond the “what” and
also explain the “why” of your company’s actions. Some companies are
distinguishing themselves by how clearly and visibly they highlight these new
compensation metrics and their rationale for adopting them. One payoff from a
clearly articulated approach is that investors who understand a company’s
rationale for its pay plans are more likely to support that company even in the
face of negative proxy advisor Say on Pay and similar vote recommendations.
While compiling what will be the 10th anniversary edition of
DFIN’s Guide to Effective Proxies, we have located many stand-out examples of
ESG and other nonfinancial performance metrics from a range of companies and
industries. Specifics will be featured in the final guide when it is released
in September. A few select examples are shown here, including Verizon
Communications’ proxy (Figure 3), which is a favorite because of its effective