A group of leading global investor organisations has convened to address open questions relating to corporate ESG reporting to provide guidance and an investor perspective to the global Corporate Reporting Dialogue and its members. This discussion paper presents the preliminary outputs from the Global Investor Organisations Committee on a range of ESG reporting issues, calling attention both to points of broad consensus, and where opinion may still be divided.
Despite growing consensus that the integration of relevant environmental, social and governance (ESG) factors into company value creation models and corporate reporting is important, listed companies and organisations providing reporting standards have yet to coalesce on an approach to the treatment and inclusion of ESG factors in company disclosure and reporting.
Progress in this area may be frustrated by measurement challenges and the endogenous nature of many ESG risks within companies. However another factor inhibiting further progress may be the mixed signals that many investors are sending about their ESG preferences.
The aim of the initiative is to provide a more unified view of investor perspectives on corporate ESG reporting. We hope that our work may provide guidance for the future development of corporate reporting on a structural level.
Of the many points raised in the discussion paper, some of the key takeaways are:
- There is a clear business case for ESG reporting for investors and companies (management and boards). Reporting can help investors and companies better understand material ESG related risks and opportunities. We cite in Appendix 2 five studies which support the claim that there is a clear linkage between ESG factors, company performance and investor preferences.
- There is no single solution – one set of metrics or a single framework – that will satisfy all users of ESG data. The heterogeneity of ESG data users – investors, stakeholders and companies – will remain and is not inherently negative. However, the Group believes it should be possible to serve different needs and still come to a more unified agenda. From companies’ perspective, ESG issues are endogenous and difficult to standardise. In spite of these challenges we believe that companies should seek to identify and publish material ESG issues and relevant KPIs as part of their annual reports. Integrated reporting may provide a good framework for this.
- At the same time, it would be beneficial for companies to disclose standardised ESG information at a basic level to complement more customised ESG reporting, just as financial accounting has required its own disclosure standards.
- Both investors and companies need to think more about systemic issues, including the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, the UN Sustainable Development Goals (SDGs) and their links to individual companies. For companies this is a matter of strategy and sustainable value creation. For investors, particularly those with longer term time horizons, systemic risks need to be reflected in valuation models and incorporated into engagement with company executives and board members.
- Investors would benefit from members of the Corporate Reporting Dialogue proactively articulating how its different bodies fit together. Where are the complementarities? Where are the disconnects or conflicts? The GIOC has found ongoing discussion useful in building mutual understanding, and we remain open to ongoing dialogue with the CRD.
It is important to state clearly that the group believes a workable “solution” can be achieved with the existing data providers and standard setters: the current members of the CRD. We support improving coordination of existing frameworks rather than creating new ones. However, it is incumbent on the standard-setting organisations to present a coherent vision of how these standards can and should fit together.
The full list of bodies forming the Global Investor Organisations Committee: Ceres, CFA Institute, Global Impact Investing Network (GIIN), Global Sustainable Investment Alliance (GSIA), International Corporate Governance Network (ICGN), Principles for Responsible Investment (PRI), and the United Nations Environment Programme Finance Initiative (UNEP-FI).
The full list of bodies forming the Corporate Reporting Dialogue: CDP, Climate Disclosure Standards Board (CDSB), Financial Accounting Standards Board (FASB), The Global Reporting Initiative (GRI), International Organization for Standardization (ISO), International Financial Reporting Standards (IFRS), International Integrated Reporting Council (IIRC) and The Sustainability Accounting Standards Board.