When investing in a stock of a company, it is a must to take time to study and understand the business and prospects of the company.
I also keep abreast of company announcements. While financial results announcements and financial reports are of great importance, the increasing impact of climate change and other environmental challenges in many industries should not be overlooked – investors need to read the company’s ESG (environmental, social and governance) or sustainability reports to have a full picture of its performance.
ESG reports are not financial reports
ESG reports and financial reports act as important communication materials for listed companies to inform their investors. However, these two reports serve different purposes.
Financial reports mainly illustrate the operations and financial performance of listed companies during the reporting periods, with profit, turnover and liabilities being the primary focus. Some investors may also refer to the “Management’s Discussion and Analysis” and “Chairman’s Message” for further elaboration on the company’s performance within the reporting period.
ESG reports, on the other hand, keep investors informed of the listed company’s sustainable development and long-term value. Typical features of ESG reports include narratives by the board of directors and management on the company’s ESG policies, key ESG factors that may have significant impact on the business, ESG-related opportunities and risks, and how they will be managed. When reading ESG reports, focus should be on non-financial factors.
The purpose of ESG reports is two-pronged. On one hand, they complement financial reports to give investors a full picture of factors affecting the return and risk of the company. While on the other hand, ESG reports allow investors to understand the environmental and social impact of the businesses, as well as the challenges presented by climate-related issue.
Revealing the board’s focus on ESG
The ESG report is a good indicator of how much emphasis the board and its management team gives to ESG issues, and whether such issues and any potential impacts are disclosed and addressed. When the board and management highly value ESG reporting, they will strive to prepare a detailed and clear report instead of presenting standard clichés.