SPANISH STOCK EXCHANGE’S VOLUNTARY MARKET GUIDANCE FOR LISTED COMPANIES FOR CORPORATE REPORTING ON ESG INFORMATION BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information INTRODUCTION Environmental, Sustainability and Corporate product offerings, customer and employee loyalty, Governance (ESG) issues are grounded in the reputation and governmental and regulatory Why is Environmental, premise that public and private organisations as approvals. They also want to understand if the Sustainability and Corporate well as individuals have commitments to society. issuer has business opportunities and competitive advantages related to environmental and social Governance (ESG) reporting Investors who tend to have a longer investment issues. important? time horizon increasingly examine business issues related to ESG factors. Thus, financial performance They may look beyond the issuer, too, and consider is no longer the only measure of a company’s value how environmental and social issues might impact and a good equity investment. the issuer’s supply chain and thereby potentially impact the issuer’s reputation and/or ability to Pressures to manage and disclose environmental source needed inputs on a timely basis. and social issues material to the business may come from stakeholders, the directors or trustees These are the principles that underlie responsible of issuers, senior management and/or employees. investment, whose ultimate goal is to identify the They see positive bottom line benefits—for example, risks and opportunities associated with a specific cost savings, increased revenue streams through company or segment, thereby refining the asset innovative products, an advantage in attracting, pricing process. retaining and motivating employees, improved risk management, enhanced reputation and customer To integrate ESG information into investment loyalty. decision-making activities, investors want high-quality and relevant data to assess company They increasingly consider the bottom line impacts risks and opportunities relative to peers. that these factors can have on revenues, costs, 2 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information Companies understand that improving long-term Another driver of responsible investment is the shareholder value is achievable by including growing supply of products and services to help How exchanges can contribute sustainability into their long-term strategy and investors manage portfolios, and at the same time to the ESG cause by disclosing fully their sustainability performance to disseminate best practices among business to investors. Here stock exchanges and listing organisations. Sustainability indexes and special authorities have a crucial role to: listing segments on securities exchanges, as well as research firms and rating agencies that specialise • Encourage better internal corporate in ESG have expanded exponentially. governance within companies, such as improving the independence and quality of boards of Because of their involvement with a wide array directors of market participants, exchanges in particular increasingly play the role of protagonists in • Consult with companies on how they should be defining the rules and best practices that reflect integrating sustainability into long-term strategic the aspiration of these participants and of society decision-making as a whole. They encourage companies to adopt best practices in corporate governance, supporting • Share guidance for companies on material the creation of new markets, and building a social sustainability issues, global initiatives and other agenda. opportunities that encourage ESG disclosure; and • on material sustainability issues, global initiatives and other opportunities that encourage ESG disclosure; and on the sustainability report or strategy. 3 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information As a natural consequence of its commitment adopt socially responsible business practices as to sustainable development, BME is constantly well as through training, which is regarded as a BME’s contribution deepening its understanding of its contribution cornerstone for the sustainable development of a to ESG to society and promoting initiatives designed to financial market. ensure that sustainability is an integral part of its management, products, services and relationships. In 2015 BME joined the Sustainable Stock Stakeholder engagement, education and Exchanges (SSE) Initiative, which is co-organised information are key elements of this effort. by UNCTAD, the UN-Global Compact, the UN- In the case of BME, as the operator of the Spanish supported Principles for Responsible Investment stock exchange, the company gears its management The promotion of corporate sustainability and the UNEP Finance Initiative. Launched in 2009 towards obtaining an optimal performance from permeates through the whole senior leadership. by UN Secretary-General Ban Ki-moon, the SSE all the assets at its disposal in a responsible and This effort to spread sustainability awareness initiative is a peer-to-peer learning platform for sustainable manner. throughout all layers of the company is shared by exploring how exchanges (in collaboration with the senior managers throughout the group. policymakers, regulators, investors and companies) As a result of this corporate vision, since 2006 BME can promote transparency among listed companies has joined several international initiatives in the area BME’s view of sustainability is based on our – and in turn their efficiency – in connection with of sustainability which contain commitments and commitment to companies, investors and all other corporate governance and social and environmental principles that add to and complement those that parties involved in securities markets, including responsibility, as well as promoting responsible emanate from its corporate vision. These initiatives to society at large. In this regard, BME’s primary investment. are as follows: responsibility is constantly to strengthen the key attributes of a sound and efficient stock market: Based on this model, by publishing its own Voluntary • The European Code of Conduct for Clearing and transparency, integrity, innovation, education and Market Guidance for Corporate Reporting on ESG Settlement (since 2006) investor protection, especially protection Information BME strengthens its commitment to • The Carbon Disclosure Project (since 2007) of individual investors. fostering business sustainability in Spain and to • The Code of Best Tax Practices (since 2010) offer examples for similar action by other exchanges • The United Nations Global Compact (since 2011) BME aims to advance sustainability in our markets worldwide. • United Nations SSE Initiative (since 2015) through projects that encourage companies to 4 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information 10 RECOMMENDATIONS TOWARD SUSTAINABILITY The race to make sustainability The purpose of the following part of the business agenda is a recommendations is precisely to race without a finishing line. New describe these criteria and point out demands will arise every day, leading the best practices for each one, so to a process of permanent evolution. as to help companies reflect on their On the other hand, while specific practices and find ways of improving issues may be more significant for them still further regardless of the stage certain economic sectors, generating they are currently at in the process of a greater or less impact on business, incorporating sustainability. there is a range of basic criteria that apply to all business activities. Para que la agenda sobre sostenibilidad 5 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information 1 2 Start by involving Find out what top management needs to change If the sustainability agenda is to be effective and add A sustainability diagnosis is a must. It will detect value for your company, the decision to implement any gaps in the company and serve as a basis for it must come from top management. It is the a short-, medium- and long-term action plan. board’s responsibility to define and control key This process will also pinpoint the areas in which topics and key performance indicators that reflect the organisation requires alignment and identify the company’s economic, environmental, social the existing structures, processes and systems that and governance impacts. should be kept because they are already adequate to the new strategy. Adopting sustainability as a business strategy often entails a cultural change, which is why it must be An assessment of your corporate documents, championed by the leaders of the organization. organisational structure and management system Their job is to explain its significance and support is a good place to start. But it’s also crucial to look any adjustments required. This means that senior at more tacit areas in the organisational culture by management needs to set the sustainability agenda interviewing managers in all areas and consulting and make sure that line organisations understand with stakeholders. and embrace the goals that have been set and the targets that have been agreed. A proof point may There are several consulting firms that specialise be whether a board member is able to explain in this type of service, helping companies identify sustainability data and their business implications opportunities and areas for improvement. On the in a one-on-one situation. other hand, this is an exercise that can also be done in house. For example, you can set up a committee Ideally this should happen as a result of a strategic with representatives of several departments to planning process, so that sustainability is put on the discuss the sustainability agenda. organisation’s agenda. Its aspirations should always go beyond compliance with the law and extend to The company can also sign up to voluntary global new business development. standards and commitments for the industry or market in which it operates. The most important point is that diagnosis and assessment should 6 become a regular exercise for the organization. BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information 3 4 Set Make public priorities commitments The next step following diagnosis is to establish It will usually help to take a look at the GRI A number of collective commitments, which may priorities. This should be done according to Aspects and Indicators as well as the GRI Sector be general or sectoral, can also help your company materiality. The materiality of the content is a key Supplements, where you will find a broad range formulate a sustainability strategy and develop factor in reporting sustainability information. of possible material issues. management processes in this direction, as well as including it in a network of learning and interaction If the principle of materiality is ignored, there is Typically, the organisation can efficiently identify with stakeholders. For instance, BME made a public a risk of reporting too much information on the between four and eight material issues, but the commitment to sustainability in 2015 when it joined one hand, or irrelevant information on the other. number varies depending on the size of the firm, its the UN - SSE Initiative and in 2016, when it made a Both of these make it difficult for investors to sector, its market niche, and its maturity in terms of Voluntary Commitment to publish its own Voluntary draw conclusions from the reported data. This the work already done on the sustainability agenda. Market Guidance for Corporate Reporting on ESG recommendation helps to define and recognise information by the end of the year 2016. materiality. It is important to note that material issues should be identified case by case and reviewed at The U.N. Global Compact, launched in 2000, which The concept of materiality is widely used in law and predetermined intervals, which can be once a BME joined in 2011, is yet another example. It accounting, and is also increasingly applied to the year or every two years, for example. requires signatories to commit to ten internationally definition of corporate sustainability agendas and accepted principles in human rights, labor relations, strategies. An issue is said to be material when it environmental management and corruption has a significant impact on a company’s financial prevention. performance and/or on its image and reputation. In other words, a sustainability issue can be considered material when it is important and a priority for stakeholders, for commercial viability and/or for efficient administration of the company. 7 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information 5 6 We also suggest your company relies on the work of a Sustainability Committee, made up of members Establish of the Board of Directors responsible for developing Sustainability Governance and overseeing the implementation of sustainability Check identity strategy and guidelines, as well as monitoring performance and decision making. The department heads and managers should then be responsible for Balancing economic, social and environmental assuring coordinated execution of the sustainability When you reach this stage, you’ll realise your results entails addressing dilemmas and making actions established by the said committee, as well as organisation is no longer the same as it was when decisions for the long term as well as the short term. for an exchange of information among departments the journey began. Inserting sustainability into To do all this, it’s necessary to create a governance and business units. strategy and management undoubtedly influences structure for sustainability encompassing all levels your objectives and stakeholder relations. of the organisation. Depending on the size of the organisation, the facilitator may be a professional in the field or even This is an excellent point at which to check whether How many instances are needed to implement this a sustainability structure in the organisation chart, the company’s identity, its mission, vision and agenda, enabling new initiatives to be developed, and should have access to top management, albeit values, reflects its new commitments. If not, it practices enhanced and the entire organisation not necessarily reporting to the CEO. Depending may be the right time to propose adaptations. aligned, will depend on the size of the organization on the sector and the maturity of the company’s and how it’s structured. However, the Board of sustainability agenda, the sustainability facilitator Directors (top management) should be given or team is typically subordinated to one of the final responsibility for these decisions. following departments: Another recommendation is that outsiders should • Financial / Risk be invited to sit on the committees involved. They • Corporate Affairs can be representatives of important stakeholders • Communication and/or experts on the subject. • Human Resources • Operations 8 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information 7 Engage with expectations. It enables a company to react in good In the future, investor relations will increasingly time and to adapt its corporate strategy to the have the opportunity (but will also be faced with stakeholders needs of society and changing values. the task) of explaining a company’s capital market story using arguments from the field of ESG. This Stakeholder dialogue also offers guidance for requires a reliable database, measurable goals and Corporate and Social Responsibility and identifying the content of sustainability reporting. comparable figures. sustainability reporting cater for the needs of many stakeholders with differing requirements Investors’ needs regarding the type and content of As already noted, this dialogue is an essential and expectations in terms of topics, as well as information, including the way such information is part of the process of identifying material issues. the format and granularity of data. As a subset of disclosed, should be decisive; other stakeholders Engagement and dialogue should be the job of the general sustainability audience, investors and such as clients, regulators and representatives both operating units and the corporate level. In the financial analysts are economic stakeholders with of civil society should also be taken into account, former case, the stakeholders are typically members distinct needs and expectations who are primarily based on their relevant importance. Investors / of the surrounding community, suppliers and local interested in those ESG factors that are material, analysts are interested in sustainability information customers, as well as other regional players. i.e. which have a significant impact on the in relation to the company’s financial reporting; company’s value. sustainability information is useful for an investor Corporate engagement will be with government, only if it fits into other strategic information relevant regulators, major customers and partners, Analyse stakeholder interests for an investment decision, such as an assessment representatives of employees and contractors, and of risks and opportunities. civil society. By engaging and dialoguing with stakeholders, the company will acquire a better understanding of how Disclosure content should not just be available In both cases, however, the identification and its activities impact the environment and society. on demand. Integrating ESG data into general prioritisation of stakeholders should follow a This is of great utility in developing ways to mitigate information can only add value for stakeholders if specific methodology and take into consideration: or offset any negative impacts. they are aware that this information exists. Hence, sustainability information should be an integral part • Responsibility An analysis of relevant stakeholders’ concerns and of general corporate information communicated • Influence interests helps to explore stakeholder expectations via established corporate communication channels. • Proximity and adapt to subsequent changes. Maintaining This should also include investor relations: investor • Dependency a dialogue and engagement with important relations officers should be aware of economic, • Representativity stakeholders is critical for tracing those (changing) environmental and social value drivers. 9 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information 7 The organisation already interacts with stakeholders to evaluate sustainability profiles. In particular, For any corporate strategy to be successful, in various ways, of course, through channels such institutional investors buy sustainability data alignment of the entire organisation is indispensable, as one-on-one or group meetings, workshops, for their own evaluation tools. Thus, the more so that everyone is on the same page and working to conferences, public hearings, councils or committees, accurate and up-to-date the company profile is, achieve the same goals. collective bargaining, an ombudsman and customer the better investors / analysts will be informed care center, and so on, not to mention web-based about that company’s sustainability performance. This applies a fortiori to the implementation of social networks. The point is to optimise the Companies should therefore be familiar with the a sustainability agenda. existing channels and leverage them to establish primary sources used by capital market relevant a more comprehensive structure for engaging stakeholders to obtain sustainability information But how to guarantee this alignment? Time and with stakeholders, finding out what they want, for their investment decisions. Companies should resources have to be invested in creating a new and building all this information into strategy and prioritise the sources and provide them with corporate culture that reflects the commitments management. Here are a few examples of the timely and accurate news about their sustainability made to further the sustainability agenda. practices typically used by organisations that want to performance. evolve and be part of a process of engagement for Various initiatives can be introduced to attain this sustainability: Expert Panel goal, such as developing and upgrading training programs that deal with social and environmental • Customer satisfaction surveys Setting up an Expert Panel is a more focused way issues, reviewing and disseminating the code of • Supplier assessment and qualification to identify and prioritise material issues. Experts in ethics, and adapting the company’s hiring procedures • Organizational climate surveys aspects of sustainability relevant to the company and to prioritise the selection of candidates who already • Collective bargaining its sector meet periodically to discuss a structured have an affinity with the agenda. • Meetings with investors and analysts agenda under the watchful eyes of the organization’s senior executives. Ideally the experts should be Employee awareness can also be raised, and internal Serve information sources of stakeholders capable of reflecting what stakeholders want as stakeholders engaged with generally, by means well as contributing technical views. The results of of communication campaigns that highlight the Information on a company’s sustainability profile these meetings should feed into the organization’s urgency of the sustainability agenda and its constant should also be made available through public business strategy and serve as a compass for the presence in people’s everyday lives, both at work sources: Research and rating agencies use data sustainability action plan. and elsewhere. 10 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information 8 9 Develop a Adjust Sustainability Policy management systems Developing a Sustainability Policy is a key step As the company incorporates sustainability into its Indicators are typically suggested by the company’s in translating strategies and commitments into business strategy and organisational culture, it needs “sustainability facilitator” after consulting all the main objectives and management guidelines. The policy to adapt its corporate commitments and management departments and business units. They should be should state the organization’s aims and procedures systems, as well as its performance assessment computed both for the organisation as a whole in sustainability management, so as to facilitate the system, as noted in the previous section. and for specific operations or activities. planning and execution of the relevant actions by all departments and business units. New corporate policies will therefore need to be The indicators should be tracked not just at the formulated and disseminated for the relevant areas. operational level but also at the management level. A good policy is brief, objective and disseminated to These include a Sustainability Policy – mentioned They should be periodically reported to the Board all stakeholders, internal and external, starting with earlier - (which may replace and extend existing (at least once a year). the former. environmental, climate change and social policies), an Intangible Asset Policy, and a Risk Policy (including Organisations that are beginning this process will find Another option is to implement economic incentives regulatory and image risks), among others. These the GRI Indicators helpful and an important source by including socio-environmental objectives in policies require management systems to monitor their of information. performance assessment systems, with a direct implementation via processes and procedures, and impact on variable remuneration and on employee by selecting and computing appropriate indicators. career paths. Departments and managers should have goals for sustainability issues as well. These Processes and procedures are important in this stage should be balanced with economic targets to of strategy development, because they ensure that the demonstrate that the company genuinely adopts a commitments made will be integrated into the day-to- triple bottom line approach. day lives of employees, and even those of third parties if deemed necessary. They also tend to institutionalise All such initiatives reinforce each other and and enforce corporate policies, strengthening the should be developed with the common objective organisation’s culture in the sphere of sustainability of encouraging employees at all hierarchical and reducing compliance risk. levels to find and propose solutions aligned with sustainability. 11 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information 10 Report your achievements Revisiting materiality in your reports Define materiality for your company and challenges When starting to prepare a report, companies Material information in business reporting is defined should be clear about the material issues identified as matters that may influence the assessment of the in the strategy and management development company’s ability to create and sustain value or that To win the trust of your stakeholders you must exercise. Not everything that is material for already do so. In financial reporting, information is be transparent. And the best way to demonstrate management purposes will be material for the considered material if its omission or misstatement transparency and accountability is by publishing report depending on its readership, and vice-versa. could influence decisions by the users of financial reports. It is essential to keep the report short and concise statements. In sustainability reporting, this scope while addressing the most relevant issues, as this is extended to environmental, social, political, legal Publicly traded companies are required to publish will ensure it is read and understood, especially by and commercial topics and indicators. annual management reports and file them with investors and market analysts. Secondary issues the market supervisor. These reports focus on and detailed explanations of more static policies The scope, weighting and granularity of reported the company’s financial performance in the and processes should be reported only on the topics may vary due to a company’s unique previous year. On the other hand, more and company’s website and linked to the printed characteristics (e.g. its business model or operating more organisations now also issue sustainability report or main section on the website. environment), industry-specific trends, as well as the reports with detailed information on non-financial level of a company’s sustainability performance. performance, especially ESG. These publications Global trends also point to increasingly frequent are useful tools for stakeholder engagement and use of various different types of report according To identify material information in the wide range broader social accountability, but they can also be to the people each one is designed to reach. of topics and indicators available for ESG reporting, used as management tools, helping the organisation Thus a company may opt to publish an annual companies should consider the following criteria, monitor and report indicators and articulating sustainability report focusing on material issues, among others: sustainability strategy, governance and supplement this report during the year with and management in a consistent fashion. updates to demonstrate accountability. These What are the key value drivers of our business statements or reports can be specifically tailored process? Integrated reports are increasingly important, to the needs of internal stakeholders, customers, however. These present economic, social and suppliers, communities, government etc. What are the material issues for relevant environmental results in an integrated format, stakeholders? ideally also reflecting an integrated strategy. 12 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information What are the most important internal and external Reporting principles factors identified as having an impact on the company’s value creation – in both the short and To make your reports credible and effective as a the long term? means of guaranteeing disclosure to stakeholders in accordance with the expected standards of Internal factors may include the company’s ability to transparency and accountability, as well as a tool respond to changing conditions; external ones may for internal management, you should follow the be political, market-related, environmental, social, internationally accepted guidelines developed by technological, or legal. Once material topics have the GRI. Some of the most important are set out been identified, the task is then to prioritise them below. by the magnitude of their effect on the company and the likelihood of their occurrence, and to • Balance • Reliability present them accordingly in the report. Information The report should be balanced, presenting both The process of collecting information up until that is not material should therefore be omitted. positive and negative facts about the company. publication of the report should be consistent, Highlighting the challenges faced during the and should permit simple checking and possibly Employ an integrated approach to disclosing year is positive because it is a demonstration of an external verification process. material information transparency on the part of the organization. • Precision To emphasise the interdependence of financial and • Comparability The information provided should be precise and non-financial information, a set of key performance The themes and indicators presented should detailed enough to enable stakeholders to make indicators should be provided in a single document. enable performance to be analysed year by a fair assessment of the company’s performance. It is important to demonstrate the linkages between year and compared with market standards and The use of estimates should be duly noted and a company’s corporate strategy, its governance with companies in the same sector. The reader their premises explained. model and its social, environmental and financial should be able to understand the context for the performance. In short, sustainability information information. should be an integral element of a company’s reporting, rather than a set of data and targets published / communicated separately from / not linked to the company’s core business. 13 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information 5 BEST Complementing the 10 As with the 10 recommendations, no recommendations set out earlier, we formal obligations associated with encourage issuers to follow five practical these steps. They are not designed to steps for corporate sustainability constitute mandatory new procedures PRACTICE reporting which can be helpful and are designed to support companies in for capital market communication that apply to listed issuers on BME’s developing a more holistic, integrated platforms. Instead, they should be seen STEPS corporate reporting with the objective of effective capital market communication. They are divided into two sections: the as a useful tool in aligning the complex issue of sustainability with the concrete information requirements of investors first three deal with disclosure content / analysts by taking capacity constraints (what to report), while the other two at corporate level into account. refer to reporting principles (how to report). Al elaborar informes, las compañías Al elaborar informes, las compañías deben concentrarse en una cantidad reducida de criterios de control contable/ financiero de la gestión. Estos deben ser relevantes para la dirección, estar 14 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information 1 2 Concentrate on a handful of key indicators and explain the Focus on a “risk and link between non-financial data return” approach and financial performance In their reporting, companies should concentrate Company analysis by the investment community and risk culture. Systems and policies should on a small number of management accounting considers and relies not just on key financial data therefore be in place throughout all operations. / financial control measures. These should be and economic merits, but also on the quality of relevant to management, linked to the corporate ESG-related content. Companies should provide Responsible business practices can enhance strategy and illustrate the impact of ESG drivers on reliable information on material components of performance and reduce the cost of external the company’s financial results. They should also be value creation (financial and non-financial), critical funding. Vice versa, a negative ESG-related backed up by a clear description. Consideration interdependencies between them and how those event could mean not just a sustained period of and / or prioritisation of the key performance factors are integrated into the strategy, governance underperformance and higher costs of external indicators (KPIs) by management will highlight and operations of a company. Taking responsibility funding, but may entail reputational damage, the company’s unique selling points. seriously requires understanding the risks and require changes in senior management and lead to opportunities created by environmental, social increased regulatory activity – or even takeover. With the emergence of integrated reporting (the and corporate governance issues. intelligent combination of financial and sustainability A company is acting responsibly when it is ready reporting), companies are assessing the link Communicate effective risk management to measure and manage its impact on society and between non-financial data (incl. ESG) and financial and mitigation the environment. In addition, there are several performance. The more companies focus on a small links between good governance and a positive number of compelling linkages between financials By paying attention to material issues for different value performance: greater transparency enhances and non-financials, and seek to describe how ESG stakeholders, companies are better equipped to investors’ confidence and positively influences drives value, the more fit-for-purpose ESG aspects foresee upcoming risks and to manage them when valuations. A responsible and results-based culture will be for investors. they occur. embraced by the top management as well as tighter supervision by the Board can help avoid a Managing risk – whether environmental, social, number of unfavourable strategic decisions such as or operational – should be an integral element of overly expensive acquisitions, poor diversification, business operations as a normal part of business management short-termism etc. 15 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information Communicate sustainability-related business globally accepted ethical labour conditions along opportunities the value chain etc. Furthermore, policies, training programmes and activities directed at reducing risks Companies face a wide range of challenging – including an anti-corruption policy, whistle-blower business trends, e.g. scarcity of Natural resources, programmes, good employee relations, monitoring new regulations, impacts of innovation and new the value chain for key environmental and social technologies etc. These require new solutions and issues etc. – may lead to lower costs of debt and hence innovative products and services that meet to higher credit ratings. societal challenges and may therefore lay the basis for future growth. All in all, higher performance, better returns, lower risks and lower cost of capital should lead to a These sustainability-related innovations may higher company valuation and a better risk / return represent unique selling propositions and should profile. be communicated accordingly. Among other things, properly managing environmental, social Providers of capital assess the attractiveness of an and corporate governance issues strengthens investment based on the quality of management, a company’s industry positioning and return on which is by and large reflected in the quality of capital. Sustainability practices are thus becoming the company’s corporate disclosures. Hence, it is crucial in order to stay competitive in the future. ultimately the responsibility of the company itself to highlight the financial value of its sustainability Highlight measures to reduce risks and leverage strategy. The better the quality of the information, opportunities the more easily it can be appreciated by the market, which in turn implies a more favourable risk-adjusted Responsible business practices not only facilitate return on the company’s shares. risk reduction but also contribute positively to operational and share price performance. Actions undertaken to improve the performance of the company are therefore critical for assessing the potential increase in the returns of the company in the short, medium and long term. Examples of such measures include accommodating customer needs, increasing innovation in products, attracting and retaining skilled labour, increasing productivity, reducing negative impacts on the environment, securing limited key natural resources, having 16 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information thing, and an indication of the expected future (e.g. kilograms of CO 2 per passenger kilometre) 3 performance 3). Keep this narrative as short and simple as possible. for their material topics. Also targets link the ESG perspective with the economic dimension of sustainability (e.g. sustainability related products as Sometimes, working with qualitative information a percentage of total sales). In general, sustainability is unavoidable. However, if a qualitative narrative targets should show a clear link to the optimisation Give preference to is used, it should always be supplemented by of stakeholder value, while at the same time being quantitative data, benchmarks and targets. consistent with the company’s long-term strategy. quantitative data Ideally, appropriate sustainability metrics should be Be as specific as possible linked to management reward systems to increase the credibility of the targets. The metrics that are regarded as being the most All content should be presented in a way that meets useful in corporate sustainability disclosures are In reality, targets cannot always be achieved. investors’/ analysts’ requirements. those that quantify financial impact, measure Reporting should reflect both positive and business opportunities and risks, and are negative aspects of an organisation’s sustainability Its structure must be clear and the organisation of transparent about the calculation methodology. performance to enable a complete assessment the report must be comprehensive, e.g. by providing If a company is facing other issues that are more of its overall performance. information in form of an executive summary, with difficult to quantify, information on mitigation key messages listed in a table or in bullet points. activities or actions designed to exploit new Provide an outlook and talk about challenges opportunities would also be an alternative way and opportunities Complement KPIs with relevant context of improving disclosure. information Investors are interested not only in past performance Provide monetary information on ESG but also in the future outlook, especially as regards Quantitative data is better than qualitative data performance, if possible expected industry trends and corporate strategies because it can be compared with similar data from for facing upcoming challenges. Forward-looking other organisations. If at all possible, sustainability- Some sustainability initiatives represent a long-term sustainability metrics play a crucial role in reporting. related data should be presented in the same investment on the part of a company and it may Investors expect companies to disclose information format as traditional financial information. Issuers be difficult to measure their effects immediately on how they plan to sustain and create mid- to long- should therefore try to “simplify” reality in an effort in monetary terms. However, there is always a term value with regard to their corporate strategy. to provide hard, objective, numerical data, bearing business case for sustainability. It can be explored in mind that the language of the financial markets by linking the ESG perspective to the financial As part of this exercise, companies should try should be applied when discussing sustainability (fundamental) perspective and vice versa. Whenever to assess the impact of their industry and of as an investment topic. possible, explain how ESG performance and market trends on the future of their sustainability financial performance influence each other. performance. Investors / analysts with a focus on sustainability appreciate well-arranged charts or tables indicating Define specific measurable ESG targets Companies should also disclose the risks they face the company’s ESG performance. This should in meeting their sustainability targets. This should – if necessary – be accompanied by a narrative In their annual reporting, companies should define include a definition of the risks and the way risks are description of why certain KPIs increased or measurable targets using both absolute data mitigated and managed. decreased, whether this is a good thing or a bad (e.g. total tons of CO 2 per year) as well as ratios 17 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information 4 Refer to standards (international /national) The five steps in this guide are generally applicable Build on widely acknowledged frameworks Present material topics according to market to any existing standard as they substantiate the usage capital market perspective. Therefore, the guide There is a variety of standards governing describes how to use existing reporting standards / sustainability reporting available in the market and Many investors and their service providers use guidelines / frameworks more effectively. companies have to decide which one(s) match best their own assessment criteria and questionnaires. to its company needs. As a consequence there Hence, despite the existence of reporting standards, currently is a certain lack of comparability. On companies still have to formulate and publish the positive side, this means a lot of flexibility for their own KPIs that are relevant to their specific companies. However, to facilitate assessment by industry sector and corporate strategy. Even within investors, it is useful to build on internationally or standards, it is increasingly recognised that the nationally recognised standards to make reported materiality of information differs between industry KPIs comparable as far as possible. sectors and that the disclosure of non-material information is – at least for investors / analysts – of Using standards has one great advantage. They give no added value. companies initial guidance on which data should be published, based on a consensus that has been A standard should therefore be seen as general reached in years of discussions in international guidance that should be thoroughly reviewed multi-stakeholder forums. Such a framework by a company to facilitate the identification and may serve as a helpful preparation / instruction prioritisation of material topics as well as to to involve other departments / colleagues in decide on relevant KPIs and disclosure usage best developing a more holistic corporate reporting. reflecting its specific industry challenges and corporate strategy. 18 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information 5 Pay attention to presentational issues With regard to existing corporate reporting practice, Forms of presentation Explain changes in the selection or development a coherent (combined) presentation of financial of KPIs and non-financial information instead of publishing After identifying the material sustainability a separate sustainability report seems to be an aspects and the relevant indicators, as well as any It is essential for companies to demonstrate the efficient solution as it offers the investor / analyst an contextual information that needs to be reported application of a clear and consistent methodology extensive source of information. (e.g. benchmark data), the next question that arises to any type of corporate reporting (financial, is one of presentation. Investors and analysts who sustainability, integrated). KPIs should be defined, are focused on financial KPIs will prefer ESG data to compiled and reported consistently. They be presented in a condensed format that is clearly should help stakeholders to analyse changes in arranged (table). Ideally, it should be provided sustainability performance over time and enable an simultaneously with the (standard) financial assessment relative to the company’s peers. reporting highlighting the interdependencies. However, if a methodology is refined, changes should be presented so that investors can still draw comparisons with previous years, i.e. companies should restate – where possible – current disclosures alongside historical data (or vice versa). Likewise, if a company is introducing new KPIs or discontinuing old ones, it should disclose the reasons for this and illustrate the benefit for stakeholders. 19 BME Spanish stock exchange’s Voluntary Market Guidance for Listed Companies for Corporate Reporting on ESG Information CONCLUSION Material ESG aspects in capital market The challenge is: communication are part and parcel of today’s investment decisions. This is because a more • to identify a small number of KPIs that are comprehensive picture of a company on the one relevant for management and evaluation hand helps evaluate its current risk profile and purposes; indicates how it is prepared to mitigate future risks. On the other hand, actively communicating • ideally, to present them using quantitative sustainability-related key figures and business metrics, providing relevant context, illustrating opportunities, as well as how these translate into interdependencies between financial data and unique selling propositions, raises awareness of ESG information, as well as with the financial corporate strengths and competitiveness. It allows reporting; and investors and analysts to gain a more accurate and robust assessment of a company and its • to systematically omit information that is not risk and return profile. Furthermore, it delivers material (and that would merely obscure key additional arguments to invest in that company messages and / or confuse investors and increases confidence and trust. Sustainability and analysts). disclosure tends to become a major principle for state-of-the-art corporate communication, The Guide is designed to help issuers provide providing for a well-balanced capital market story. investors and analysts with this information efficiently and effectively and, by doing so, to The 10 recommendations, including the 5 best enable better-informed investment decisions. practice examples, illustrate an approach that aims to achieve more holistic corporate reporting, using limited resources that will effectively meet the needs of the capital markets. 20 Bolsas y Mercados Españoles www.bolsasymercados.es Plaza de la Lealtad 1, Madrid