ESG Reporting With the Trakref-Darden Matrix

ESG (environmental social and governance) reporting and climate related financial disclosures are becoming more mainstream. Ten years ago, corporate ESG data reporting was done by only the most progressive companies, but now, it is not only expected but becoming required. The SEC is moving forward to make certain ESG reporting important and required for publicly traded companies. California’s senate also passed SB 260, which will make certain reporting required for companies making $1 billion or more in revenue.

Despite the fact that some elements of ESG reporting is becoming required, not every company is at the same level when it comes to their maturity. Some companies have complex ESG reports, moving beyond a simple task force or ESG factors and making sure that ESG is part of their corporate governance. Their reports contain auditable standards and metrics, and they are already reporting ESG data along with their financial disclosures.

On the other hand, some companies are just getting started with ESG reporting. They may not even have an ESG report, or if they do, it contains only the most basic information. They may also be showing their sustainable development through greenwashing, or painting business ethics and sustainability reporting through a better light than concrete numbers and financial reporting would actually reveal.

We know that as legislation and rulemaking comes into play, there is more need for businesses, investors, and other stakeholders to have benchmarks for ESG information and ESG disclosures. This is why, along with Darden School of Business, we created the Trakref-Darden Matrix for ESG Maturity. Our matrix provides a simple way to score a company based on ESG disclosures and other ESG criteria.

 

 

The Matrix Scoring

Our matrix takes two types of pressures into account when it comes to sustainability reports and business models: ESG awareness and external pressure.

In the ESG awareness category, there are five total points based on the following criteria for a company:

•  Whether they have a ESG report
• Whether they are using a framework
• If ESG metrics are part of their SEC filing
• If they have a CSO or other C-suite level role focused on ESG

In the external pressure category, the highest score is a nine. Points are based on pressure from the following:

• Investors
• Finance
• Consumers
• Industry
• Media
• Regulators

Matrix Layout

On the y-axis of the matrix lies ESG awareness. On the x-axis, we have external pressure.

The matrix is broken into four quadrants that provide a score that shows how well a company is working through climate change and climate risks when it comes to ESG:

1. High ESG awareness and high external pressure
2. High ESG awareness, low external pressure
3. Low ESG awareness, high external pressure
4. Low ESG awareness, low external pressure

Each of these provides insight into how a company is dealing with climate-related disclosures, ESG performance, and ESG reporting in general.

High ESG awareness, high external pressure

In quadrant one, we have what companies should strive for as they work toward energy efficiency and to have better ESG reporting standards.

At this level, ESG goals are integrated into business decisions and the company has high maintenance maturity. Data analytics related to ESG are part of corporate governance, and leaders understand the principal risks related to climate change and human rights in their company. ESG isn’t shipped out to a separate legal entity – they are working on the issue in-house and understand its importance.

Companies in this category also have a strong influence on stakeholders and are leading the way in the industry. Other financial market participants and member firms turn to them when deciding on a reporting framework and how to incorporate sustainable investing principles into their own practices. They have strong ESG performance and fully understand their sustainability risks.

These companies also have a willingness to continue the ESG journey. Just because they are leaders on ESG practices and ESG issues does not mean they see themselves as perfect.

As far as the new SEC regulations, these companies have the potential to at least meet or even exceed them.

High ESG awareness, low external pressure

Companies in this category are doing alright as they manage risk and environmental impacts related to ESG, but the company’s performance still has room for improvement. They are starting to integrate ESG goals into business decisions, but still have some ways to go before it is a key focus of corporate governance.

This is not to say that companies in this category don’t have good environmental performance and a mature understanding when it comes to non financial information in ESG reports and their maintenance maturity. They are actually ahead of the industry for now, but will need to continue to put in work to stay relevant

Companies with high ESG awareness and low external pressure will probably meet the SEC’s new ESG requirements without much issue. They may have to put in a little bit of extra work, but they are in good shape.

 

 

 

Low ESG Awareness, High External Pressure

Companies in this category are not up-to-par with ESG performance or maintenance maturity. They may still be participating in greenwashing, and their ESG reports may not have all the information that they should.

At the same time, they have a high amount of pressure put on them by external stakeholders. This means they may be able to scale quickly, but they still have a lot of work to do to get there.

Low ESG Awareness, Low Pressure

Companies in this category are similar to the last category in their awareness. They’re greenwashing and don’t have the best standards when it comes to their ESG reporting and maintenance maturity.

At the same time, though, they are also facing low external pressure. Aside from the SEC and California, there is no one telling them that they need to do better when it comes to their ESG standards. This means they not only have a lot of work to do, but need to keep the pressure on internally to make sure they have what investors and other stakeholders need.

 

ESG Maturity Equals Maintenance Maturity

One of the major outcomes of this study, in addition to being able to map out this matrix, was finding that ESG maturity is a predictor of maintenance maturity. In fact, they are correlated – how mature a company is in their ESG is how mature they are in their maintenance.

A company that is only focusing on being compliant and is not looking to the future of sustainability likely has poor maintenance. They are not predicting what will happen with their assets and how it will impact future events – they are simply responding to issues as they happen and providing “band-aid” fixes.

To be mature in ESG also requires maturity in maintenance. Maintenance supports ESG, and they cannot be separated.

Lining Up With Other Thought Leadership

When creating the matrix, we did background research to see how we could create something useful that wasn’t already available. As we did our research, we realized that many stakeholders are unhappy with the lack of ESG information that companies are putting out. This information is not always standardized, and different companies put out different amounts of information, so there isn’t always a one-to-one comparison.

In the investor community, this can lead to a lot of frustration. When making investment-related decisions, going off of voluntary standards without third party assurance makes it difficult to compare companies. Frustration also comes from consumers, especially those interested in corporate social responsibility. It can be difficult to sift through what is auditable data and what is greenwashing when making purchase decisions.

Previous research and thought leadership identifies the need for more standardization. There have been some efforts that we’ll address, and we think that our matrix fits neatly into these efforts to move from purely qualitative disclosures to showing a companies’ true maturity around their annual reporting on their environmental impact.

Sustainability Accounting Standards Board And Others

One of the main issues that we’re seeing around ESG reporting is standardization, and there are a number of groups trying to combat this. There’s the international sustainability standards board, Global Reporting Initiative, SBTI, GHG protocol, and the Sustainability Account Standards Board.

All of these work to make capital markets more responsible toward the environment and provide standards for companies to work toward. This is in the hopes that investors and other stakeholders will have an easier time comparing companies if there are clear-cut standards to use, just like there is in financial reporting with GAAP.

The problem, though, is that there is still diversity in standards, so there is still no international framework. This is why we wanted to create our own matrix that does not rely on these standards. With our matrix, no matter what standard a company is using, stakeholders can gauge how mature a company is related to ESG reporting.

 

ESG Maturity is More Important Than Ever

While there may be struggles with standardization around ESG reporting, reaching ESG maturity through annual reports and financial statements is more important than ever. Rob Fisher writes about this in an article for Forbes. He discusses what companies are lacking as the SEC’s new rulemaking to make climate disclosures required for publicly traded companies comes into play.

Fisher point to a 2020 KPMG survey of sustainability reporting. In the survey, KPMG found that of the top 100 companies across 52 countries, 40% of firms acknowledged climate change in financial disclosures. This may sound like a good number, but when comparing this statistic to other surveys, it shows just a 15% increase since 2017.

Fisher also compares ESG reporting to digital transformation that companies had to undergo a decade ago: “ESG is for the 2020s what digital transformation was for the 2010s—a critical way for organizations to retain and improve their relevance, their operational seamlessness, and their ability to cultivate and maintain public trust.”

To conclude his article, Fisher writes that “The world is watching—and so is the SEC.” This is where our matrix comes in.  It makes observation easier and allows both companies and stakeholders to have a better understanding of where a company falls when compared to others.

 

 

ESG is Top-of-Mind

ESG maturity is not a niche topic that companies can ignore. In a post on the Harvard Law School Forum on Corporate Governance, Stefanie Chalk, Pru Bennett, and Dan Lambeth from Brunswick Group LLP discuss how they expect ESG to rank high on the agenda during this year’s AGM season.

In their post, they point to the fact that there is increasing scrutiny around climate commitments. Investors and other stakeholders are now specifically looking for:

• “full disclosure of climate change-related risks in line with TCFD reporting;
• details about relative and absolute reductions of greenhouse gas emissions across scopes 1, 2 and 3;
• decarbonization plans with milestones that are detailed, science-based, Paris-aligned and certified by a reputable organisation like the SBTI;
• alignment of capex to and P&L impact of climate targets;
• disclosure of corporate lobbying practices to ascertain whether they are Paris-aligned;
• details on exactly how decarbonization is to be achieved and how related issues, like biodiversity loss and deforestation, are addressed as part of decarbonization plans; and
• recognizing and mitigating the social impact of decarbonization strategies on affected employees and communities”

This is where our matrix comes in. It allows stakeholders to judge at a glance which companies are truly following through on their commitments, and which ones are falling behind.

Moving Away From Greenwashing

One of the common themes in thought leadership around ESG reporting is the need to remove greenwashing and move to auditable, accurate data that shows maturity around sustainability issues.

In an article for Bracewell, Rachel B. Goldman, Thomas F. Kokalas, and Timothy A. Wilkins discuss this trend. They caution companies not to create disclosures and commitments that ring false – greenwashing like this is ultimately inviting legal action from investors when they cannot live up to them, especially as more legislation and rulemaking are passed to make climate disclosures required.

Our matrix lays out when companies are following through on commitments and when they aren’t, making it easier for stakeholders to understand a company’s maturity and to hold companies with immature reporting responsible. Companies that overstate would end up in the fourth quadrant of our matrix, getting a low score, while companies that are truthful about where they are and how they are achieving goals would end up in the first quadrant, getting a higher score.

The matrix provides simple benchmarking to move away from greenwashing. It pushes companies to move beyond fluffy marketing reports and have auditable, mature data. After all, they are able to see that others are achieving these standards, and that they will fall behind in stakeholders’ eyes if they continue with immature practices.

The Matrix and ESG Journeys

ESG reporting and standardization are increasingly under scrutiny, especially with new legislation and rulemaking from the SEC. It’s no longer an option to provide ESG data – but not all ESG data is the same.

As companies are preparing for these new requirements, we hope that our matrix will provide a way to gauge where they are. We also know from this research that ESG maturity and maintenance maturity are linked, and where a company ends up on our matrix shows their maturity in both. We also hope it is a useful tool for investors and other stakeholders as they look to operationalize maintenance.

We plan to continue to refine our matrix as the SEC, California, and ESMA move forward in their new rulemaking, standards, and legislation. We see this as an ongoing project.

Join us for a conversation

We’ll discuss our matrix in more depth at our open mic on June 9. You can register now.

If you want to have an easy reference point about our research, you can also download our free handout on the matrix.