Building Your ESG Program: Part 4

Materiality Assessment Why do companies undertake “materiality” assessments for ESG matters? The reasons are threefold: first of all, regulatory requirements...

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Best Practices to Effectively Respond to Investor ESG Questions

For many, filling out a seemingly endless number of ESG questionnaires can feel rather tedious. However, this sometimes-numbing exercise does not diminish the importance and necessity of ensuring questionnaires are filled out in a way that is both effective and productive. Care should be taken with each questionnaire to ensure consistency with accurate and informative responses that will not only provide clarity, but also facilitate friendly relationships with investors.

Best Practice #1: Craft Effective Responses

Understanding the purpose and scope is the first step in tackling an ESG questionnaire. If you are trying to save time by copy & pasting answers from other questionnaires you have already completed, you might miss the mark.

Take a step back and conduct the necessary research to fully comprehend why a particular rating agency or investor has asked you to fill out this questionnaire. Is it different than other questionnaires you have received in the past from that particular party? If so, how? And even more importantly, why is it different? It’s important to know the big picture before you dive in, as it may help you provide more detailed responses.

Additionally, make sure to utilize industry-specific standards and frameworks when filling out questionnaires as a natural starting point. Then, fill in the blanks by providing context and explanations for any apparent data gaps. Give an accurate and balanced representation of your company, even if it might not be the most polished story to tell. The important thing to keep in mind when responding to ESG inquires is that doing so gives you the opportunity to control the narrative of your company through honesty and transparency.

Best Practice #2: Ensure Consistency Across Responses

We know that having too many “cooks in the kitchen” can lead to undesirable results. This applies to ESG questionnaires too. These questionnaires might initially be sent to the IR department, the corporate secretary’s office, the CFO, or even General Counsel. If the company has a Chief Sustainability Officer or Chief Diversity Officer, they, of course, are natural candidates to be the addressee as well. Regardless of who receives the questionnaire, it’s critical for every company to develop an internal process for responding to ESG inquires that promotes the crafting of consistent responses that have been vetted for accuracy and completeness. This process should be updated over time, and considered part of a company’s disclosure controls for SEC reporting purposes.

As part of this process, consider how you can best implement the following elements of disclosure controls:

  • Establish a centralized database to ensure consistency in your responses;
  • Create a system for tracking and updating your ESG performance metrics; and
  • Establish a process for tracking and responding to inquiries to effectively manage and monitor investor interest in particular topics.

How ZMH Advisors can help:

  • Utilize ZMH’s proprietary ESG dashboard to eliminate time spent on researching investor priorities. Understand “red flag” areas that investors are focused on and search through recent questions asked by investors during engagements.
  • For companies that have already publicly disclosed how they are handling ESG issues, we can assist with creating consistent responses and help you proactively engage investors through an ESG roadshow to reduce the number of inbound ESG inquiries.
  • For companies that have not publicly disclosed ESG data – or aren’t ready to draft a full ESG report – we can help you to draft a simple ESG Profile that can be posted on your IR web page in an effort to begin crafting your ESG story and addressing the most common top priorities of investors and rating agencies.

Best Practices to Effectively Respond to Investor ESG Questions

Posted Date: 04-12-23


A “How To” Manual for Enhancing Investor Relations

Relationships are important in just about every facet of life: personal, familial, and professional. It should be no surprise that fostering good working relationships with the governance teams of institutional investors that hold a significant stake in your company is critical to long-term success in investor relations.

Why It’s Important to Have Relationships with Institutional Investors

Institutional investors can significantly impact what happens in your company. As owners, they can exercise their voting rights to influence governance and policy of the company – most notably through mergers and acquisitions, director elections, and other major ESG Initiatives. They can submit shareholder proposals and join forces with other investors to become “activists” seeking to change the business strategy and/or leadership. They can even “vote with their feet” and sell their stake, thereby depressing your stock price.

Your investors may have relationships with significant external influencers. They might lobby federal, state, and local politicians to enact or enforce laws which impact a company’s bottom line, or they might already have relationships with members of your board of directors or major customers and suppliers. Maintaining a wide-ranging perspective about how your institutional investors exert influence is beneficial to understanding the nuances of your relationships with them.

Good investor relationships can be leveraged to better understand investor perspectives and priorities. Their ideas and suggestions may improve the execution and development of your business strategies.

Good shareholder relationships can improve your reputation with other stakeholders, including potential customers and suppliers. It can boost employee morale or even help generate interest among other investors in the broader community.

Tips for Building & Maintaining Relationships with Governance Teams

For each institutional investor, companies should seek to build relationships with both the portfolio managers as well as the members of the governance/stewardship teams (sometimes referred to as the “proxy committees”).

The company’s finance and investor relations teams are often tasked with building these relationships, though it is beneficial to include individuals from different departments depending on the topic of focus and the level of detail requested. These teams could include HR for DEI discussions, Head of IT for insight on cybersecurity protections, or a sustainability officer for deep dives on Scope 1 and 2 emissions.

Here are five tips to consider when developing governance team relationships:

  1. Identify key contacts – It’s fundamental to know who to talk to, but not always easy to identify the key points of contact. As institutional investors do not provide public directories and typically have turnover on their governance teams, this task can feel impossible. Do your homework, connect with multiple governance team members, and keep a log to track who you met with and what was discussed to ensure you can put your best foot forward.
  2. Conduct research on investor proxy voting guidelines and past voting records – Familiarity with an investor’s voting guidelines and recent voting history is essential; neglecting this task will give the investor a sense that their time is being undervalued, and you will likely be unprepared in addressing their questions and concerns. This can close doors and hinder relationships.
  3. Tailor engagement strategies to fit investor priorities and preferences – Once you know who your key contact is and what they want (and don’t want), you can tailor your communications to address their priorities in a persuasive manner.
  4. Be proactive to address investor concerns and suggestions – Once you get input from investors, create action items, and execute. Take it upon yourself to be sincere; the investor might not expect the company to do everything requested, but the manner in which you deliver both good and bad news can do wonders for your relationship if you operate with tact.
  5. Leverage technology for engagement – The use of technology to facilitate investor engagement can instantly place valuable data at your fingertips. It can be difficult to stay on top of 50+ investor relationships, while navigating the nuances of each. Utilize the technology tools that are available to you.

The ZMH advisory team not only has requisite expertise to partner with you to get the most out of your engagement efforts, but we also have the technology tools so you can manage – and improve – your relationships with governance teams.

Check out our Investor Engagement Dashboard to see how our proprietary technology can help you transform your relationship management, cut your engagement preparation drastically, and position you as an essential team member.

To schedule a demo of our Dashboard, please contact us at

Posted Date: 03-15-23

Building ESG Program for Pre-IPO and Private Companies

Build an ESG program for my private company? Why bother if it isn’t required? These are fair question to ask since building an ESG program doesn’t appear to impact revenue or business operations on its face.

The answer is not that complicated: an ESG program actually can produce net positive impact in terms of increased revenue, reduced costs, and higher investments. There are many opportunities for companies that are ahead of the curve – or even those merely keeping pace – to integrate ESG into their business strategies in a manner that creates value. Climate change isn’t going away. Neither are the concerns over social equity and inclusion.

An ESG program can help build trust to foster employee engagement and retention. It can help a private company partner with the communities in which it operates. And it definitely is a key component of any risk management program.

Probably most important, key customers or suppliers might insist that a private company have a robust ESG program as part of their own Scope 3 emissions evaluation. Not having an ESG program – with its attendant data and policies at the ready – could lead to loss of business, in the form of both existing and potential clients.

Leading private companies are building ESG programs to be a differentiating factor among peers. These companies have placed a high enough value on brand equity and reputation to rationalize the initial investment. ESG is inevitably going to be discussed as part of any stakeholder engagement. And for any private company hoping to one day go public, having an ESG program already in place ahead of that IPO will not only facilitate regulatory compliance, but help to advance discussions with potential investors, particularly institutional funds most of whom have already integrated ESG into their valuation and risk management processes.

Best Practices for ESG Programs in Private Companies

The steps for building an ESG program for a private company are the same as for a public company. They are:

  1. Conduct an ESG risk assessment – You’ll need to build your ESG team, hopefully led by someone with project management skills.  This team will be responsible for establishing your baseline – where you’re at right now – by conducting an ESG risk assessment.
  2. Establish ESG goals and objectives – Once you know where you are, you want to establish where you want to be going forward. Accordingly, you’ll want to set an ESG strategy along with goals and objectives. You want to be realistic in setting your strategy. But also choose some targets that help you move the needle.
  3. Engage with stakeholders – To help set your strategy, you should engage with stakeholders. Your key stakeholders at this point are pretty much everyone that has helped you along the way. Your investors, customers, suppliers, employees and the communities in which you operate. When you engage, you want to be thinking of these questions so that you can get answers to them: “What ESG topics matter most to your stakeholders? And what should be the metrics and targets that create the best alignment?”
  4. Integrate ESG into business processes – Once you know your ESG strategies, you need to integrate them into your overall business processes so that your goals and objectives can be met. You need buy in from your employee base, from your customers and suppliers, so it’s important that senior management and the Board is behind your ESG mission and can communicate that message well.
  5. Measure and report on ESG progress – Now you need to find out whether your ESG strategy is paying off. Are you meeting your goals and objectives? How can you communicate your progress to? You need measuring and reporting systems in place in order to capture the information needed for this analysis.

Performance Challenges and Considerations

This all is easily said but in actuality it can be challenging to accomplish because nearly all companies continually face headwinds – both foreseen and unforeseen – that make it easy to push ESG to the backburner. In addition, ESG poses issues on its own, including:

  1. Difficulty finding the proper resources and expertise – ESG is constantly evolving so it can be difficult to find people with the knowledge-base necessary to get your program off the ground fast. Good candidates might not be willing to join a company that hasn’t shown commitment to ESG before. And it can be hard to find service providers who really know what they’re doing. Many providers claim they know ESG as a marketing ploy because it’s such a hot topic at the moment.
  2. Balancing ESG considerations with other business priorities – For those companies just trying to survive this year, this quarter, ESG doesn’t seem to be something that is a “must do.” That might be true, but some effort can be made by viewing ESG as a business opportunity that can help improve the company’s overall value proposition and long-term viability.
  3. Managing the costs of ESG initiatives – Here is where a well-executed risk assessment bears fruit. Figuring out what makes sense for your company at this time and hiring providers that are cost-effective is important. You must be realistic in setting goals and objectives.
  4. Measuring the impact of ESG initiatives and reporting on performance – Once an ESG strategy is set, that doesn’t mean that it shouldn’t be continuously evaluated as to whether that strategy continues to make sense. Adjustments are inevitable. The key is making the time to make those modifications – and making the modifications in a way that benefits the company’s strategy, reputation and bottom line.

ZMH allows you to maximize the ROI on your ESG investment in resources, initiatives and disclosures. We help to:

  • Determine key stakeholders and perform materiality assessments;
  • Measure and establish data-centric baselines (determine emission boundaries, calculate Scope 1 and 2 emission footprints, etc.);
  • Establish ESG goals and objectives;
  • Formulate carbon reduction strategy and relevant climate policies; and
  • Create an infrastructure that effectively integrates ESG into business process that can evolve with increased measuring, reporting, and policy-enhancing demands.

Building ESG Program for Private and Pre-IPO Companies

Posted Date: 02-16-23

Building Your ESG Program: Part 4

Materiality Assessment

Why do companies undertake “materiality” assessments for ESG matters? The reasons are threefold: first of all, regulatory requirements essentially mandate it so that companies disclose the type of ESG information that might be material to a reasonable investor. Secondly, stakeholders want ESG information, but particularly ESG information that is material. And finally, companies need to know what ESG matters are material to them so that they can use that information to better execute  business strategy.

Financial Materiality

As we all await the SEC’s final new rules on climate disclosure – expected to emerge in the second quarter of this year – it’s a pretty good bet that the SEC’s final rules won’t disturb the formulation of the “materiality” concept that practitioners have been long acquainted with: “financial materiality.”

The SEC’s rule proposal last year focused on “financial materiality” – defined as “information that can have an impact on public companies’ financial performance or position and may be material to investors in making investment or voting decisions.” The SEC could have gone other ways, such as exploring the notions of “double,” “dynamic,” and “nested” materiality, but the SEC avoided any mention of those alternative definitions in its rule proposal – probably due to the looming specter of a legal challenge over its authority to do so.

However, you should be familiar with these alternative definitions as other regulators – either within or outside the US – or other stakeholders may ask you to provide climate disclosures beyond “financial materiality.”

Single materiality is inwardly focused: “how does this impact the company?”

Double materiality is both inwardly and outwardly focused: “how does this impact the company as well as our stakeholders?”

Nested materiality essentially is a hybrid of the single and double materiality standards.

Dynamic materiality is materiality that may be changeable or fluid over time.

“Reasonable Investor”

Going back to financial materiality, the input of your independent auditors when making a materiality determination is invaluable, as well as inevitable in most cases. The auditors will be applying the SEC’s Staff Accounting Bulletin No. 99 – and this statement last year from the SEC’s Chief Accountant is a good primer on how to apply SAB 99.

The financial materiality analysis is made through the lens of a “reasonable investor.” Those within a company should place themselves in the shoes of what a reasonable investor would think. This is easy to say, but the reality is that it’s an elusive threshold because materiality determinations are challenged with the benefit of hindsight. What might seem reasonable to you might not to a court that is tasked with deciding whether your materiality determination is actionable.

What type of ESG information does a “reasonable investor” react to? Stock price movements aren’t the final word when analyzing which disclosures are material, but they sure can be instructive. A recent study – “Which Corporate ESG News Does the Market React To?” – conducted by George Serafeim and Aaron Yoon found that stock prices react only to industry-specific financially material ESG news, and the reaction is larger for news that is positive, that receives more news coverage and relates to social capital (relative to natural or human capital) issues.

Investors that submit shareholder proposals to companies might use a company’s ESG disclosures (or lack thereof) to help them determine whether to submit a shareholder proposal to that company. Or a company’s ESG disclosures could lead an investor – or a group of investors – to undertake an activist campaign against management. Other stakeholders – such as customers or communities – also could use that information to partake in activism. So there are many reasons why you want to disclose all material ESG information publicly.

Line-Item Requirements

In addition to the judicial “reasonable investor” threshold, there are a number of line-item requirements in the SEC’s regulations that elicit ESG disclosures. In other words, companies are required to make these types of ESG disclosures even though a reasonable investor might not deem them to be material. In a sense, the SEC’s rules make them de facto material by mandating them.

When the SEC adopts final climate disclosure rules in the near future, there will be a host of these line-item requirements in the climate arena. Proposed new Item 1501 and 1502 of Regulation S-K, among others, has a host of various climate-related requirements in there – ranging from assessing “physical risks” and “transition risks” – to carbon offsets and internal carbon pricing – to targets and goals and board oversight. Not to mention the impact all this has on the financial statements. As noted in this Reuters’ article, companies should be planning their data strategy now to meet the coming line-item requirements.

The SEC bolstered rules that have resulted in more social disclosures a few years ago – particularly focusing on human capital and board diversity. And the SEC says it will be proposing rules that will result in even more human capital disclosures by the end of this year. There is a laundry list of governance line-item requirements that the SEC has had on the books for the past two decades, ever since the Sarbanes-Oxley Act and Enron.

Protecting Yourself

Protecting yourself when making a materiality decision is key, particularly when the decision is made not to disclose something. Sure, a misleading disclosure can get you in trouble. But an omitted disclosure can be even worse. You want to bounce disclosure ideas off as many people as possible, and as high up the corporate ladder as you can.

When it comes to climate matters – when internal and disclosure controls are being built for the first time, when a financial materiality analysis is being applied for the first time – there is a heightened risk that something can go wrong. So you want as many resources as you can muster to ensure you’re not off the mark.

How ZMH can help: We can help you to tackle “materiality” assessments. ZMH offers a low cost, turn-key solution with an approach that focuses on:

  1. Mapping your company’s current ESG profile against the SEC’s baseline disclosure requirements to identify potential gaps (our “Baseline Assessment”);
  2. Identifying what should be your company’s appropriate internal resources and expertise with the goal of addressing any gaps in disclosure that are identified;
  3. Helping to develop your TCFD, Scope 1 and 2 and other disclosures to assist in meeting the SEC’s minimum expected disclosure requirement.
  4. Conducting a comprehensive ESG Materiality Assessment in order to better understand how your various stakeholders – including but not limited to clients, suppliers, employees, etc – deem material to your company.

Building your ESG Program Part 4

Posted Date: 02-01-23

Building Your ESG Program: Part 3

Setting Targets & Metrics

After you assemble your team to help build your ESG program and your company comes up with an ESG strategy, you’ll need to establish a framework to execute that strategy. An important part of this step is knowing what to consider in your target-setting process. This will enable you to cover all bases when choosing the right metrics to track your progress.

In selecting your targets – if you’re a public company – it’s helpful to know what the SEC has proposed as future disclosure requirements for Green House Gas (GHG) emissions. Companies shouldn’t be limited to the SEC’s mandated disclosures (when finalized), as there are demands from other key stakeholders beyond regulators to consider. But knowing what the SEC has proposed is as you begin to think about metric and target tracking, is a good place to start.

Under the SEC’s proposal, companies would be required to disclose the baseline year for their GHG emission targets – and that baseline year would need to be consistent for all targets designated by each company. Many companies set near-term, medium-term and perhaps even longer-term targets. For those companies with overlapping commitments targets – such as a goal of net zero GHG emissions by 2050 pursuant to the Paris Agreement, or a plan to cut Scope 1 and 2 emissions by 50% by 2030 and reduce Scope 3 emissions by 35% by 2030 – they would be required to disclose all of those targets.

Other elements of the SEC’s climate disclosure proposal would require reporting on:

  • The scope of activities and emissions included in the target;
  • The unit of measurement, including whether the target is absolute or intensity-based;
  • The defined time horizon by which the target is intended to be achieved, and whether the time horizon is consistent with one or more goals established by a climate-related treaty, law, regulation, policy, or organization;
  • The defined baseline time period and baseline emissions against which progress will be tracked with a consistent base year set for multiple targets;
  • Any interim targets set by the company;
  • How the company intends to meet its climate-related targets or goals;
  • If a company uses carbon offsets or Renewable Energy Credits (REC) in its plan to meet targets and goals, there would need to be disclosure about the amount of carbon reduction represented, the source of the offsets or RECs, a description and location of the underlying projects and the cost of the offsets or RECs; and
  • Whether – and how – the board sets climate-related targets or goals and how it oversees progress against those targets or goals, including the establishment of any interim targets or goals.

Beyond the SEC’s proposal, you should keep abreast of other industry standards and frameworks, including:

  • Regulators – The International Sustainability Standards Board (ISSB) is a standard-setting body established in 2021 under the direction of the IFRS Foundation, whose mandate is the creation and development of sustainability-related financial reporting standards to meet investor needs for sustainability reporting. The ISSB is expected to finalize a set of standards in 2023 and the SEC is expected to piggyback off the ISSB’s work.
  • Rating Agencies – There are numerous rating agencies that investors use to help them determine whether to invest in your company and what level of commitment is appropriate. CDP and Dow Jones Sustainability Indexes are organizations that rate companies only if the company completes their questionnaire. If their rating is important for your company, you will need to complete the survey. Others, such as MSCI, ISS ESG, ISS QualityScore, and Sustainalytics, create assessments of your company based on publicly available information.
  • Institutional Investors – Institutional investors have their own investing guidelines, as well as voting policies. You’ll want to keep abreast of changes in stewardship & voting policies of the investors that are important to you. You also may receive requests for information from investor coalitions. It’s always in your best interest to talk to them, as it may head off a shareholder proposal down the road.
  • Industry Trends & Peers – You’ll want to participate in forums within your industry to keep abreast of what is being discussed about trends that impact your industry. You’ll want to read the disclosures made by peer companies to ascertain what their goals and metrics are – and how they’re progressing.

The bottom line is that when deciding which metrics and targets to use, you’ll need to consider what type of information you’ll be required to – and want to – publicly disclose. The concept of “materiality” plays into that and we’ll dig into that complex concept in our next blog.

How ZMH can help: We can help you to tackle this three-step process. ZMH offers a low cost, turn-key solution with an approach that focuses on:

  1. Mapping your company’s current ESG profile against the SEC’s baseline disclosure requirements to identify potential gaps (our “Baseline Assessment”);
  2. Identifying what should be your company’s appropriate internal resources and expertise with the goal of addressing any gaps in disclosure that are identified;
  3. Helping to develop your TCFD, Scope 1 and 2 and other disclosures to assist in meeting the SEC’s minimum expected disclosure requirement.

Renewable Energy Credit – a tradeable, market-based instrument that represents the legal property rights to the “renewable-ness”—or non-power (i.e., environmental) attributes—of renewable electricity generation. (Source link)

Building Your ESG Program Part 3: Setting Targets & Metrics

Posted Date: 01-18-23