Incorporating ESG into the way the financial ecosystem operates helps create an economically efficient and sustainable financial system that contributes to long-term value creation and benefits the Kingdom as a whole.
Many of the companies listed on the Saudi Exchange already embody the principles and practices that underpin ESG because they recognise the intrinsic value of a sustainable growth model. However, more needs to be done to ensure that the efforts already undertaken are recognised and that more listed companies are encouraged to disclose more regarding ESG.
Stock exchanges globally are playing an increasingly important role in promoting the cause of sustainable development. They are well placed to connect national markets to global ESG investments trends and build capacity by promoting ESG standards, products, services and practices. ESG information provides insight into the quality of corporate management and helps investors forecast company performance by providing a more comprehensive view of the company. Practical analysis of relevant ESG factors has become a fundamental part of assessing the value of an investment for many investors. For these reasons, investors ask companies to communicate how they manage ESG-related risks and opportunities.
Benefits of Disclosing on ESG
Corporate solid performance on ESG factors correlates positively with the improved cost of capital and financial performance. Integrating sustainability into a company’s valuation methodology will assist in communicating how a company is addressing the world’s most pressing challenges, from poverty and education to climate change and biodiversity. Addressing these challenges promotes more prosperous economic systems that benefit all participants and create more stable and resilient markets within which companies operate.
Benefits of ESG disclosure for listed companies:
- New unlocked capital
- Improved profitability and growth
- Enhanced reputation and branding
- Advanced disclosure and risk management
- Stronger investor relations and engagements
ESG Reporting Formats
Companies can report ESG information as a stand-alone sustainability report or integrated report. Reporting formats may involve trade-offs between breadth and depth, focusing on material issues and covering a broader horizon that addresses the relationship between ESG and the business strategy.
Companies shall take practical steps to ensure that their ESG disclosures are relevant to their investors. Listed companies must ensure that their reported data is of investment-grade quality and explains the strategic relevance of the ESG issues to their business. There are different advantages to each type of reporting, and each issuer should consider which approach will best suit their own needs and those of their investors. Reporting is just one part of the more comprehensive dialogue listed companies have with investors. We recommend the ESG reporting to provide a basis for dialogue with the investors, not as a replacement for this dialogue.
Stand-alone sustainability reporting. These reports address the relevant ESG information needs of investors, stakeholders, consumers, and civil society. Stand-alone ESG reports consolidate the information in a single location and do not necessarily need to align with the style of the annual report; issuers can adopt a style of presentation for raw data, tables and charts best suited to ESG information. The separation can imply that sustainability information is considered separate from the company’s core business.
Integrated reporting. The concept of an integrated report is that ESG information and data are presented in an integrated manner within the annual report. This model has been promoted by the International Integrated Reporting Council (IIRC) and aims to offer investors a more rounded, concise, and holistic insight into business performance and impact over the short, medium, and long term.
Publishing well-considered reports that provide high-quality ESG information and data, and placing other relevant information such as policies online, will make it increasingly feasible for your company to point investor’s requesting responses to ESG surveys toward your published materials instead.
How to Optimise ESG Reported Data?
There are several steps that you can take to ensure your report is of the greatest possible value to investors:
Separate policies, processes, and methodologies. Annual or sustainability reports featuring large amounts of detail around policies and methodologies can obscure new information and key messages. To avoid this, incorporate standing information repeated every year in an appendix or separate document and signpost it from the report.
Make it easy to find and access. Ensure that the report is prominent. Promote it on the corporate website, including the investor relations section, include a link within news releases to the markets, and summarise findings in investor presentations. Provide data in spreadsheet format, hyperlink to corresponding financial statements, or further ESG information.
Consider language. Ensure the language used and its accessibility meet the needs of the investor base. For example, for listed companies on the Saudi Stock Exchange Tadawul, ESG reporting is most effective when the disclosures are in Arabic and English to reach a broader targeted segment of professionals globally.
Combine data tables and include historical information. Disclose three to five years’ worth of historical information and data. Where there are significant corporate changes such as acquisitions and de-mergers, the reports and information about the previous entities should also be retained.
ESG reporting is no longer an excellent add-on to financial reporting. Investors want to understand how well companies manage the risks associated with ESG issues, seeing this as a critical test of management quality. Robust sustainability and ESG strategies increase business resilience and help improve overall company performance.
Sager IR promotes good standards in Saudi Arabia and supports all its clients throughout their ESG journey, no matter where they are in the process. We support listed companies and investors in making ESG communication effective.
We encourage listed companies to explain which ESG issues they see as relevant or material to their business and how ESG issues may affect their business, e.g. through legislation, reputational damage, employee turnover, license to operate, legal action, or stakeholder relationships. And how these impacts may affect business strategy and financial and operational performance. Before presenting this information to investors, we recommend taking the time to understand what information and data the investors are looking for. This should include ensuring companies are informed about what their industry peers globally are reporting on.