Sustainability goes mainstream as regulators and industry bodies propose ground rules and frameworks for ESG data and reporting
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While it may seem we have been on the cusp of mainstream integration of sustainability – or ESG issues – for many years now, perhaps 2020 was the year it actually happened. Indeed, so much is happening at so many levels, from the identification of global systemic risks that are not of an economic nature (prima facie) but of an environmental or social nature to the awakening to the reality of climate change and the need for science-based targets and measures to avoid the most catastrophic impacts of global warming.
We are recognizing that our economic, social and environmental well-being are both interconnected and concurrent, and these winds of change are blowing hard and fast. Nowhere is this more tangible than in capital markets, where the global integration of sustainability/ESG considerations into capital allocation decisions is attracting massive inflows of funds into ESG-type investments and driving calls for more and better corporate sustainability practices and reporting.
In such a context, IR Magazine’s 2020 ESG Integration Forum – US played an essential role, providing us with an opportunity to pause, level-set our collective understanding in a field where the body of knowledge is created even as we speak and get a glimpse of where future trends are likely to take us. The event, held virtually – Covid-19 oblige – on December 3-4, 2020, convened subject matter experts from various disciplines who helped do just that.
One of the overarching themes of the conference revolved around ESG data and information, which included topics such as the quality of data, the need for more quantitative performance measurement, the calls for science-based data to set relevant targets for climate action and the complexity of the ESG ecosystem of third-party data from ratings, rankings and research providers that have proliferated in response to investors’ growing appetite for more decision-useful ESG information.
On this topic, shortly after the conference, the European Commission (EC) in January published a comprehensive study on sustainability-related ratings, data and research, in which it recommends a number of measures to improve the transparency of ESG ratings and to address potential conflicts of interest by sustainability-related ratings, data and research providers. There are in fact growing calls for such third-party providers to be regulated, in part because they often play different (sometimes conflicting) roles, such as consultant, data provider or ratings agency, either to companies, investors or both. Below is a summary of the EC’s recommendations:
- Disclosure of sustainability-related rating methodologies
- Industry standards for sustainability-related rating and data products
- Communication of sustainability-related ratings, data and research with target companies
- Purpose and limitation statements for published sustainability-related rating, data and research products
- Public disclosure of the management of conflicts of interest by sustainability-related rating, data and research providers
- Sustainability-related declarations by asset managers
- Enhancement of company sustainability-related disclosures
- Clarity on terminology and capacity building on sustainable finance and sustainability-related products and services for all market participants and stakeholders.
Another overarching theme of the ESG Integration Forum centered on the standards, frameworks and platforms that can be used to produce sustainability reports. Here, too, the multiplicity of differentiated approaches, combined with the voluntary nature of sustainability disclosures, remains a source of confusion (and growing frustration) for many companies. The trend of convergence toward a universal reporting standard was very aptly addressed in a number of panel discussions and has only intensified in the few short months since the forum.
In late December the five main non-profit organizations in the field of sustainability reporting – recently dubbed the Group of Five: CDP, Climate Disclosure Standards Board, Global Reporting Initiative, International Integrated Reporting Council and Sustainability Accounting Standards Board – followed up on their declared intent to work together to achieve comprehensive corporate reporting with the release of a prototype sustainability-related financial disclosure standard. This prototype standard may well serve as a beacon of things to come, given its premise of adapting the IFRS conceptual framework to sustainability-related financial disclosures.
The IFRS received almost 600 responses to its consultation on establishing a new sustainability standards board, most of them supportive. As a result, it is moving forward with its initiative to produce a proposed roadmap and timeline by the end of September 2021, possibly leading to an announcement on the establishment of a sustainability standards board at the meeting of the UN Climate Change Conference COP26 in November 2021.
Perhaps most notable of all has been the speed and scale of change of the new US administration under President Joe Biden. The immediate rejoining of the Paris Climate Agreement, the appointment of the most diverse cabinet in US history and the record number of executive orders to address issues such as climate change, science-based decisions, income inequality, healthcare and immigration are but a few of the measures the new president has taken in his first few weeks in office. One such measure of particular relevance for publicly listed companies is the appointment of a senior policy adviser for climate and ESG at the SEC, a new position with responsibility for advising on environmental, social and governance matters and advancing related new initiatives across the commission’s offices and divisions.
As they say, the only constant is change. And we can expect the coming year to bring more change in the area of sustainability reporting in what we believe will lead not only to a single universal standard for sustainability disclosures, but also to a consolidated standard for financial and non-financial disclosures that will be mandatory.
Needless to say, we can already look forward to the next edition of the ESG Integration Forum – US and the opportunity to once again level-set and shed light on the road ahead.
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Contact
Marie-Josée Privyk, head of ESG innovation and customer success, Novisto
