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 “callout” approach.