TCFD reporting drives ESG integration in annual reports

Sep 12, 2022
Companies struggle to find ESG-related opportunities, finds Luminous

The introduction of mandatory TCFD reporting is helping to boost awareness of climate-related risk and making ESG the thread that runs through annual reports.

This is among the findings in an analysis of reporting from major institutional investors by strategic communications firm Luminous. Companies increasingly link ESG not just to their strategy (16 percent), business model (14 percent) and KPIs (15 percent), but also to executive remuneration (16 percent), demonstrating that they are taking the issue seriously, Luminous says.

‘The relatively low rates of ESG integration into purpose (11 percent) and investment case (8 percent) suggest companies struggle to identify ESG-related opportunities,’ the report notes. ‘The strong showing of ESG in risk management (20 percent) seems to confirm that ESG is viewed predominantly through a risk lens. Some companies still don’t have any non-financial KPIs.’

The Luminous findings chime with the latest report on executive compensation from IR Magazine, which reveals that three in four investors expect senior management pay to be linked to ESG. It is a practice only a minority of companies undertake, however, with just 46 percent of boards linking executive pay to ESG metrics.

ESG not a reason to invest

Stephen Butler, director of investor engagement and ESG disclosure at Luminous, says his firm’s research shows ESG is no longer confined to a dedicated ESG section but is increasingly integrated into all key sections of the annual report. The rising awareness of climate-related risk, driven at least partly by the introduction of TCFD reporting, is reflected in the ‘strong representation’ of ESG in risk management, where climate change is increasingly discussed as a principal risk instead of an emerging one.


Stephen Butler, Luminous

‘Moreover, ESG is ever-more frequently linked to executive remuneration, either directly through KPIs or indirectly by including non-financial performance metrics in long-term incentive plans, bonuses or executive scorecards, with many companies citing investor expectations as a reason for this development,’ Butler says.

But he adds that companies are less likely to link their purpose to ESG, suggesting they still find it challenging to identify ESG-related opportunities for their business, ‘even though they increasingly reference the value they create for all stakeholders, including wider society and the environment, in their business model and strategy.’

He finds ‘most disappointing’ the low score for ESG as reason to invest, ‘possibly exacerbated by the decision by a number of companies in our sample not to include an investment case in their annual report at all – a puzzling choice given that investors look to both financial and non-financial performance as indicators for the long-term attractiveness of investee companies.’

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