One year ago, five organizations “of international significance” came together to try to bring some coherence to the confusing world of disclosure standards for environmental, social, and governance (ESG) activities and investments.
Two key challenges around ESG disclosure in company boardrooms, among asset managers, and for policymakers are definition and measurement. The Securities and Exchange Commission (SEC) is expected to move forward with rulemaking this year and next on mandatory disclosure for climate impact, human capital management, and board diversity. The European Union is already farther down the road, having issued a number of rules and directives seeking to standardize ESG investment.
In a recent Financial Times story ($) about “greenwashing” allegations at a German asset manager, some striking observations were made:
- Portfolio manager: “The definition of what ESG or responsible investment truly is, has been up for debate ever since it was created.”
- Industry executive: “Data quality is really bad. It’s like trying to invest with data from the 1980s.”
- In a 2020 investor survey by BlackRock, “poor quality/availability of data and analytics” was rated as the top obstacle to ESG investing.
In another FT story, an executive from BPC’s ESG partner S&P Global pointed out, “What’s happening at the moment, in terms of the need to develop more comprehensive and standardized disclosures, is the mother of all battles.”
This is why those five organizations came together in September 2020, to “resolve this confusion and to show a commitment to working towards a comprehensive corporate reporting system.” The five organizations are the leading framework- and standard-setters in this area.
We were fortunate to have two of those organizations—the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB, now the Value Reporting Foundation)—participate in a June event, “Disclosure Standards and Frameworks: What’s it all Mean for Stakeholders?” Additional participants represented the Edison Electric Institute (EEI) and Task Force on Climate-related Financial Disclosures (TCFD).
Below are insights from the event that help shed light on this “mother of all battles” over ESG disclosure standards.
Good information is the lifeblood of good decision making.
We’re really trying to create the holistic picture of what are all of the elements that go into arriving at what a company’s impacts are—good, bad, or indifferent.
There are two elements required to be included in SASB standards. There needs to be evidence of investor interest in a particular topic or metric. And there needs to be evidence of financial impact of that environmental or social risk—sometimes an opportunity—actually impacting a particular industry and the typical company within an industry.
This information is not intended to only be a benefit for others. It’s intended to be a benefit for the company—to change their approach, to change their strategy, to change their business model, to change their minds about what they’re going to do.
Environmental, social, and governance risks do not present evenly across companies, and so having industry specificity is really important to giving investors the kind of decision-useful information they require in making their decisions.
I don’t envy the SEC, where they sit right now, because they’re going to have to find the right balance
It’s increasingly evident that policymakers and regulators want to have consistent information that may not yet be financially material or have a financially material risk to the value of an individual organization. But collectively, on a systemic basis, it’s critically important. … There’s a variety of valuable policy decisions that can be arrived at based on this information
This isn’t easy, it takes a lot of effort, a lot of concerted effort. It takes leadership. And it’s not a once and done. ESG is an evolving area and we need to evolve with that.
In fairness, for companies, that’s a big burden on them. They would like some rules of road, and they want comparability and a level playing field. … You have to balance the burden on the preparers with the needs of the users