Miranda´s ESG thoughts – The 101 on ESG Disclosure

Hope you are having a great week and welcome back to our brief thoughts on ESG.  This week I’d like to talk about ESG information disclosure.

Communication is key

Slowly but surely more and more companies are starting to consider all their stakeholders in their business planning. This is unsurprising as more and more investors are integrating ESG factors into their investment processes. But is coming up with the right ESG strategy enough for a company? Not really. Having a comprehensive ESG strategy is undoubtedly fundamental, but being able to reach your different stakeholders and share with them the whole picture is just as important.

Most investors are used to incorporating standardized data into their valuation assumptions. In particular, they are used to quantifiable factors. They rely on financial standards and definitions to understand what a company’s current situation is and what its outlook may look like. With this they can reach a “fundamental value” of a share or a bond and decide what to do with it.

As ESG has come closer to the financial markets, investors are struggling to incorporate factors that are sometimes perceived as subjective or at the very least difficult to measure. Strategies that are very long term oriented or that have an impact that is not that obvious become difficult to translate into numbers. If you add to that the fact that many companies disclose their ESG strategies and results in a very inconsistent way (and some companies don’t even disclose it fully), it all becomes muddier. At the same time, corporates are many times unsure as to what data they should disclose and how to do it. As ESG reporting standards are anything but standardized, it’s easy to see why everyone is struggling.

What are the best standards to follow?

There are 3 frameworks that are the most used globally:

• GRI (Global Reporting Initiative) – these are probably the most widely used standards. They are focused on what impact the company is having on the world by providing visibility on ESG issues to all stakeholders.
• SASB (Sustainability Accounting Standards Board) – focused on how ESG issues affect the company’s financial outlook. They provide guidance per industry on issues that are likely material for companies and most relevant to their investors.
• IIRC (International Integrated Reporting Council) – focused on concise reports that combine ESG issues (mainly focusing on mega-trends) with the regular financial-focused annual reports.

There are other well-known providers of reporting frameworks like CDP (mostly focused on the environment), or questionnaire providers like DJSI (Dow Jones Sustainability Index) and MSCI, and even the UN SDGs (Sustainable Development Goals) which can help corporates envision their sustainability priorities going forward.

What is going on in Mexico?

Out of the 144 companies listed in the BMV, 47 (33%) publish annual sustainability reports and 19 more (13%) publish something on sustainability within their integrated annual reports. This means, only 46% of public companies in Mexico report about sustainability. Within independent sustainability reports 83% follow GRI guidelines, only Televisa incorporates additional SASB concepts, and 3 (Arca, GCC, and Vinte) discuss MSCI ratings. There also exists a BMV-designed format to report a sustainability self-evaluation. 47 (33%) of public companies have used that format at some point.

Hope this was of use. As usual, if there is anything we can help you with, please reach out. Also, don’t forget to recommend any ESG subject matter that you would like us to research and put in a forthcoming weekly

Regards,

Marimar

Partner, Miranda ESG