As corporate sustainability goes mainstream, ESG reporting is being embraced beyond early adopters exuding good citizenship. Investors, markets and regulators are picking up on the value of environmental, social and governance data, which is being integrated more often into financial disclosures.
"People have realized that sustainability disclosure and sustainability information has significant value," said Janine Guillot, CEO of the standards-setter SASB (Sustainability Accounting Standards Board).
Soon, more companies will be forced to divulge environmental and social data, whether due to new laws and regulations, investor demands or simply to remain relevant and competitive, experts shared at the GreenFin 21 virtual event Tuesday.
What's more, the momentum behind harmonized visions of corporate reporting is offering hopes of streamlining workflows for sustainability professionals, while improving the quality of data available to the public.
1. One singular sensation?
Those whose jobs involve toiling over the clichéd "alphabet soup" of reporting frameworks — from CDP to CDSB and beyond — probably would like to see a reporting "singularity" realized. However, consolidating the various standards down to one uber-acronym isn’t realistic.
What’s happening instead, Guillot noted, is a rapid move toward a more coherent way to describe an end-to-end process that includes management and board decision-making; external reporting; investor and multi-stakeholder use and policymakers.
The takeaway for companies? Allocate resources toward participating in disclosure standards, she said, similar to the way that setting financial accounting standards works among companies, accountants and investors involved with the International Financial Reporting Standards Foundation (IFRS). Because corporate managers understand the standard bearers, credit agencies and external reporting requirements in financial accounting, she presented that as an analogy to follow.
"I think that's what we need to aim to achieve about sustainability disclosure," she said.
It’s not a tick the box sort of beauty contest anymore.
Rather than getting sucked into confusion around all the sustainability reporting acronyms, focus on what financial standard-setters are trying to do in terms of offering material information to investors, advised Tim Mohin. He's the CSO and executive vice president of Persefoni, which makes carbon reporting software, and a former chief executive of reporting giant GRI.
"The trend line is clear that we will see financial standards for climate disclosure in the very near future, and regulations to require that information," Mohin said, and that should coexist with longtime standard-bearers such as GRI. "Because after all, if we hadn't had the previous 20 years of ESG disclosure, voluntarily, we wouldn't be at this place."
2. The mandates are coming
Watch for mandates emerging from the European Union, followed by the United States. Europe is updating its non-financial reporting directive, and the U.S. Securities and Exchange Commission is starting to take action to require companies to disclose material ESG information.
"These are just the tip of the iceberg," Mohin added. "There is just a lot happening in this space."
Meanwhile, President Joe Biden has assembled a "dream team" elevating climate diplomacy, with John Kerry as special presidential climate envoy and Gina McCarthy as White House national climate advisor. So sustainability professionals and investors alike should expect more action around the "G" for governance in ESG.
3. If not unification, collaboration?
Even if one framework to rule them all is unrealistic, there is momentum toward collaboration among the standards bodies. Five of the leading reporting groups — CDP, CDSB, GRI, IIRC and SASB — in September issued a "statement of intent to work together towards comprehensive corporate reporting."
Control your story, control your story, control your story.
As for big business, in January, 60 leaders from Accenture to Zurich Insurance Group signed on to the notion of "Common Metrics and Consistent Reporting of Sustainable Value Creation," as advocated by the World Economic Forum's International Business Council.
Also at the start of 2021, BlackRock CEO Larry Fink urged in his closely watched annual public letter for businesses to disclose climate risks in line with the Taskforce on Climate-related Financial Disclosures' (TCFD) recommendations. Weeks later, the Goliath asset manager warned of voting against companies that resist disclosing their climate risks or decarbonization plans.
Meanwhile, big banks have been launching voluntary climate disclosure initiatives.
4. High stakes, high finance
"When you're talking about setting standards for global capital markets that are endorsed by regulators, it's an entirely different ballgame," Guillot said.
Massive strides in that direction over the past year include the nonprofit IFRS moving to establish a sustainability standards board that would sit alongside the International Accounting Standards Board. And an IFRS working group involves many members of the "alphabet soup" and is supported by the International Organization of Securities Commissions (IOSCO).
"There's a path towards convergence around what we call foundational disclosure, external disclosure from companies to providers of financial capital," she added.
At the same time, even more acronyms are cropping up. "There's a new kid in town, if we didn't have enough confusion with the alphabet soup," Mohin said, referring to the Partnership for Carbon Accounting Financials (PCAF). It offers financial services companies a way to allocate their investments against the amount of carbon that investment produces. "So you can basically keep track of your 'financed carbon', which is rapidly becoming a very big issue in the investment community."
5. Embrace your story
When ESG standards become mandatory and ubiquitous, how should companies merge the hard data with storytelling?
"I say to companies all the time, 'Control your story, control your story, control your story.'" Guillot said. "That's why you should disclose and not let other people define you."
When you're talking about setting standards for global capital markets that are endorsed by regulators, it's an entirely different ballgame.
Know your target audience and work backward from there, she advised: Investors, for example, want to hear about strategy, governance, risk management and performance, which makes the TCFD framework useful for broader sustainability disclosures.
Although some audiences are more story-oriented, in some cases you should assume it’s a technology and not a human reading your information, Guillot added.
6. Beyond checking the boxes
Mark Gough, CEO of the Capitals Coalition, said the digitization of ESG data is exciting because it moves away from the old rhythms of pushing out reports once a year, which he compared to water flowing through a pipe with holes in it.
"Actually, we're moving more to a lake where you'd go and dip in, and you get it out … That's something where we're going to see a significant step forward, when we start getting the technical companies and others involved in this process."
Along those lines, Mohin described a need for tools offering real-time, forecastable information for company leaders. "It’s not a tick-the-box sort of beauty contest anymore," he said.
7. The social factor
It’s critical to look at an organization’s direct and indirect environmental impacts on the well-being of stakeholders, Gough said. (Paying attention to people is one reason the Capitals Coalition renamed itself from the Natural Capital Coalition.)
"This is the key thing here — who is actually being impacted by it, and are they involved in the process of understanding it?" he said.
In addition, interest in corporate disclosures via frameworks such as GRI and SASB appears to be spreading internationally, especially beyond developed nations.
"Something around the COVID outbreak has actually inspired a lot of people to start thinking about this in a slightly different way, particularly in emerging markets," said Gough, who described a massive interest by African nations, including Madagascar and Uganda, which have often previously been left out of the picture.