Board to set global ESG standards

22 Jun 2021

A new body is tasked with defining a new global ESG reporting methodology to replace the existing complicated and diverse range of approaches. Andrew Holt reports.

A new global body is to be created to support sustainable investors by establishing a more streamlined approach to ESG. The IFRS Foundation will launch the Sustainability Standards Board (SSB) at the UN’s COP26 climate summit in November.

What this hopes to achieve, with the backing of another acronym, the International Organisation of Securities Commissions (Iosco), the umbrella group for global markets watchdogs, is for a more standardised ESG reporting framework.

It is much needed. Asset owners have consistently complained about the lack of a standard reporting methodology within the pages of portfolio institutional.

As a process, this began in September last year, when five leading independent standard setters announced they would work together towards a comprehensive corporate ESG reporting system, with the backing of the International Monetary Fund and the United Nations – so it has some big hitting supporters. Then earlier this year, rules came into effect in Europe to make financial firms and investors disclose “double materiality” – covering the risk their operations pose to society, the environment and to their profitability.

Credible comparisons

But there are stumbling blocks, with the idea of standardised ESG reporting being questioned. Some companies argue that the unique nature of their operations will make exact like-for-like comparisons difficult, if not impossible.

And here we are met with more questions than answers. Such as: can, and should, ESG and sustainability measurements and reporting serve not only companies and investors but also people and the planet? If so, how can this be done?

And can a framework for reporting on climate change — the SSB’s key priority — be applied to complex social issues while assisting with comparisons across different sectors and a wide range of jurisdictions? And crucially, how many national governments will, and should, adopt a global standard to make it global? You do no want a baseball World Series scenario where the only teams that participate are North American.

These are complicated questions that need to be addressed in a very detailed way to be answered. Yet the fact they are raised means the issue is making progress. But it is one of increasing importance, as asset owners typically, are the ones setting ambitious ESG targets. So a uniform standard needs to equate with their expectations.

Quality rating

There is a justified concern that to measure a social and environmental impact, current methodologies, in some cases, allow companies to cherry pick how they’re assessed in ESG rankings. This is no measurement at all and makes an ESG reporting standard all the more important.

The Global Reporting Initiative was launched in 1997 to offer sustainability-focused reporting guidance. Although this often turned out to be nothing more than a marketing tool: resulting in a big promotion of the corporate social responsibility report for a company wanting to promote its sustainability narrative.

Yet few then would have imagined how many frameworks, ratings systems and standard setting organisations would emerge from the desire to find a better and more thorough way of measuring companies’ social and environmental impact.

There is also the vitally important Task Force on Climate-related Financial Disclosures (TCFD), which has provided a solid framework on which others can build. Created by the Financial Stability Board, the rulemaking body set up after the financial crisis focuses on climate change. But this could clearly be applied more widely.

The TCFD has built up momentum and respect. More than 2,000 organisations have shown their support for the TCFD’s recommendations, including companies with a collective market capitalisation of almost $20trn (£141.3trn) and financial institutions responsible for $175trn (£123.7trn) worth of assets. It does show there is a desire, and need, to embrace a standard ESG reporting approach.

Placing capital

Another complex issue within the whole debate is how companies understand the way social and environmental factors matter to their business – until then, they cannot seriously assess their ESG or sustainability performance. There is the added complication that what is “material” to one business may be less relevant to another.

This is something the Sustainability Accounting Standards Board (SASB) has recognised. In 2018 it devised a set of standards for corporate disclosures covering material issues for 77 industries. “The standards,” says SASB, “identify the minimal set of financially material sustainability topics and their associated metrics for the typical company in an industry”.

To all of this, the SSB hopes to step in and offer an answer: it is why an overarching system is the way forward. The strength of the SSB is its heavy focus on reporting, and ESG measurement and reporting are increasingly seen as essential for putting capital in the right place, which should lead to governments across the globe adopting its set of standards. This would be a huge step forward. A lot is on the SSB therefore to truly deliver.

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