ESG data on top of investors’ wish list

By: Robert Scharfe, CEO, Luxembourg Stock Exchange Nov 2019

Trade tensions, the advent of new technology and low interest rates are common topics of discussion among investors these days. But the quest for a steady financial return is not the only concern that shapes investment decisions. There is another clear trend emerging among investors, namely the desire to contribute to the United Nations Sustainable Development Goals (SDGs) and the fight against climate change - in short, to bring positive change to society. Investors increasingly search for sustainable finance investments and now require more transparent data on the companies and projects in which they invest.

Calls for transparency

As a response to investor demand for more information about companies’ sustainability approaches, more and more organisations are embedding Environmental, Social and Governance (ESG) aspects into their business strategy and decision-making processes, and furthermore providing transparency to investors and other stakeholders through ESG reports.

Corporate ESG reporting offers investors, future employees and other stakeholders a window into the quality of a company’s management and the environmental and social impact of a company’s activities. ESG reports – or sustainability reports – illustrate a company’s approach to sustainable development and the level of its commitment to the shared, global goals.

A change of mindset

Today, companies focus on sustainability for different reasons: one driver is the desire to contribute to sustainable development; another and as important reason is that it is in their best interest. The climate crisis presents significant financial risks and most companies want to reduce risks. As the CEOs of leading global companies have stressed lately: taking the interest of all stakeholders into account is ultimately good for shareholders.

However, this is not a “tick the box” exercise, but the result of a necessary change of mindset. Investors are demanding data and now using what previously was referred to as non-financial data as part of their core investment analysis, to better predict a company’s future performance and risks. After all, sustainability is about generating long-term value while reducing risks, and these are aspects most investors appreciate.

Broadening the scope

While there are clear signs that companies are increasing their focus on sustainability, the pace of change and the level of reporting vary enormously. Many organisations are still in the very beginning of their sustainability journey and discussing how to best report on their efforts.

In October, the Luxembourg Stock Exchange published a set of comprehensive guidelines for reporting on ESG aspects. Reflecting the unique diversity in our capital market ecosystem, LuxSE’s Guide to ESG Reporting addresses the specific scope and needs of three different groups of stakeholders in international capital markets: companies, issuers of sustainable debt instruments, and asset managers active in sustainable & responsible investment funds.

We are certainly not the first exchange to provide support and guidance to companies by producing and making available a set of comprehensive ESG Guidelines. Exchanges play a crucial role in making capital markets more sustainable. However, we go beyond standard market practice and provide guidance that is relevant not just for companies that are in the process of incorporating ESG considerations into their strategy, but also for issuers and asset managers. These stakeholders have a very different scope, and their ESG reporting therefore requires a different approach.

More than finance

The LuxSE Guide to ESG Reporting serves as a compass for users when identifying ESG activities and defining an ESG strategy. The guide furthermore covers the process for data collection and processing, and offers advice as for how to establish the most suitable reporting format, communication channels and reporting period.

Investors are drivers of change and have the power to make finance greener and more sustainable through their investment choices. Any company wanting to secure future growth and interest from investors should therefore look carefully at incorporating ESG aspects into their strategy and business models, including their supply chains. If they fail to do this, investors and shareholders may redirect their investments towards more sustainable alternatives. A quick glance at investors’ wish lists is enough to conclude that financial data alone will no longer suffice.

Explore or download the LuxSE Guide to ESG Reporting here: https://www.bourse.lu/guide-to-esg-reporting