Standardizing ESG Reporting: A look at the disclosure initiative landscape
15 August 2017
By Dinka Lutvic
For well over a decade, investors have expressed interest in ESG issues and want to know about such aspects as a company’s exposure to climate risk, its efficiency and stewardship in using natural resources, the quality and safety of its products, the type of product claims it makes, and how it treats its workers. The good news: Corporates around the globe have been listening to these demands, and are responding by issuing sustainability reports that disclose aspects of their ESG program. And while standards or timely disclosure of ESG issues is not mandated by law, there has been an increase in ESG reporting tools and government involvement worldwide. In the United States, the Securities and Exchange Commission (SEC) requires periodic reporting (Form-10K) on the risk factors, and have recently published a guidance regarding disclosure related to climate change. Similarly, in the UK Strategic Reporting (SR) Regulations require companies to disclose human rights, diversity and greenhouse gas emissions.
In just three years, over 100 new mandatory tools have been introduced across 64 countries. Because of this level of activity in ESG reporting, over 80 percent of the world’s top economies by GDP in 2016 mandated ESG reporting in some form. Mandatory ESG disclosure requirements are still very new and don’t provide a full overview of what should be reported. For companies that want to showcase their commitment to ESG issues and go beyond what is required by law, there are a number of non-profit, independent organizations that provide full guidelines and support for voluntary ESG disclosure reporting. Public companies such as Nestle, UPS, Pearson, and Johnson & Johnson look to the following associations for guidance in their ESG reporting.
Global Reporting Initiative (GRI)
GRI is an international independent organization that helps businesses, governments, and other organizations understand and communicate the impact of business on critical sustainability issues such as climate change, human rights, corruption and many others. With thousands of reporters in over 90 countries, GRI provides the world’s most widely used standards on sustainability reporting and disclosure, enabling businesses, governments, civil society and citizens to make better decisions based on information that matters. In fact, 92 percet of the world’s largest 250 corporations report on their sustainability performance. To view the GRI standards, click here.
International Integrated Reporting Council (IIRC)
IIRC is a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs. Together, this coalition shares the view that communication about value creation should be the next step in the evolution of corporate reporting. The International Framework has been developed to meet this need and provide a foundation for the future. To view the International IR Framework, click here.
Sustainable Stock Exchanges (SSE)
SSE is a peer-to-peer learning platform for exploring how exchanges, in collaboration with investors, regulators, and companies, can enhance corporate transparency – and ultimately performance – on ESG issues and encourage sustainable investment. The SSE is organized by the UN Conference on Trade and Development (UNCTAD), the UN Global Compact, the UN Environment Program Finance Initiative (UNEP FI), and the Principles for Responsible Investment (PRI).
Sustainability Accounting Standards Board (SASB)
SASB is an independent, non-profit organization that maintains sustainability accounting standards that help public corporations disclose material, decision-useful information to investors in mandatory filings. The SASB, through its Foundation, also provides education and resources that advance use of the standards. To learn more about the SASB standards, click here.
Principle for Responsible Investment (PRI)
More than ever, investors are actively engaging with their portfolio companies on ESG issues as part of their fiduciary duty and also to protect the long-term value of their assets. PRI is an independent, investor driven organization that engages with global policymakers but is not associated with any government. Their mission is to encourage investors to use responsible investment to enhance returns and better manage risks. It works to understand the investment implications of ESG factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions. The PRI acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole.
Regardless if the aspects of ESG reporting are mandatory or voluntary, public companies still have a responsibility in disclosing their commitment to environmental and social issues. At the very least, we know that following ESG best practices drives stock value and attracts investors. Nearly 80 percent of asset managers and asset owners incorporate ESG factors into their decision-making, according to a survey from BNP Paribas Securities Services. The report, titled “Great Expectations: ESG – What’s next for asset owners and managers,” found that among the asset owners incorporating ESG, 46 percent plan to invest at least half of their assets into funds that incorporate ESG by 2019. This drive is increasing the need for a standardization of ESG reporting and while government bodies still have not mandated it, IRO’s can look to independent organizations dedicated to standardizing ESG disclosure reporting for guidelines and best practices.