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Last week, the United States House of Representatives passed a law that would require state-owned companies to report environmental, social and governance (ESG) measures. Disclosure would be broad and dictate specific expectations for reporting on climate risk, political spending, CEO compensation and tax rates.
The bill, simply titled the 2021 ESG Disclosure Simplification Law, follows the decision of the United States Securities and Exchange Commission (SEC) to open public comments on climate change disclosures to inform its impending directions – and brings us one step closer to mandatory ESG disclosure.
Yet, if simplification is the goal, two standards are starting to dominate ESG 2021 reports: the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosure (TCFD). Take for example these figures: in 2020, 558 companies reported SASB standards. By midway through 2021, the number already stands at 611. This, compared to just 118 adopters in 2019.
The reasons for this expansion, at least in the United States, are twofold. First, SASB ultimately helped provide much needed clarification on the ESG issues that matter most to investors. And it has simplified the point of entry by encouraging companies to adopt the advice to the best of their ability instead of waiting until they feel they can answer every question in its entirety. Progressive transparency has been essential in moving companies forward.
In the absence of a common denominator in the way ESG reporting is defined or structured, standardization of voluntary reporting has proven difficult, if not totally out of reach.
Second, the SASB and TCFD work well with complementary indicators, providing registrants and investors with comparable data on these specific issues in a consistent and standardized way.
In anticipation of this momentum, SASB and the International Integrated Reporting Initiative (IIRC) merged to form the Value Reporting Foundation (VRF). The two united organizations work with their extensive networks and global scale to influence policy and regulation, the ultimate goal being consistency and standardization.
Or, as Neil Stewart, VRF’s director of corporate outreach, puts it, “alignment and convergence”.
“We want to create simplification, not additional complications,” he said. “Global companies need to disclose in a more standardized way for ESG risks to become truly quantifiable. While SASB is gaining traction in the US, IIRC is mainly used in Europe to inform integrated reporting, and that’s not a problem.
Join the dots
In part, Stewart alludes to the reality within most businesses over the past two decades. In the absence of a common denominator in the way ESG reporting is defined or structured, standardization of voluntary reporting has proven difficult, if not totally out of reach. ESG reports conducted by companies’ legal affairs or investor relations departments are distinctly different in scope and structure from those conducted by the corporate communications or sponsorship team. What is needed is the right connection of the points between these teams.
The SEC’s ESG working group is currently conducting due diligence on how ESG reports should be defined and structured to provide the data investors need for decision making.
For Stewart, the solution, at the end of the day, must be market-driven and investor-driven. “We always push companies a lot to use materiality to guide their reports,” he told me. “For some industries, SASB guides them on these material issues. For others, the IIRC is a more meaningful means of disclosure. And that might be okay as long as we ultimately drive company-wide decision making. “
Since the start of my own adventure with sustainable development / ESG communication, I have always recommended that companies approach reporting as a tool and not as a result in itself. Ultimately, this effort is only worthwhile if it identifies gaps, improves internal processes, and directly influences how a company integrates ESG risks into its decision-making. An ESG report then becomes a tool for change.
Quantify the value
This is when you start to see disclosure informing integrated thinking. And integrated thinking leads to integrated action, which, in turn, is rewarded with easier capital flow. “Being able to show these links between climate change and business continuity, between human rights and business continuity, etc., which can inform management decisions and involve stakeholders and shareholders, c ‘is when ESG reporting is at its best, ”explained Stewart.
Not so high on his list of best practices? Insertion of a two-page document on ESG performance in an annual report. It’s not integrated reporting, he says. Nor does it necessarily show how the company integrates ESG risks and opportunities into the sustainability of its business. “It’s not enough context. That’s not enough to tell me how ESG performance creates or destroys long-term value for the business.
As the SEC’s public comment period draws to a close, several other organizations and companies have submitted their comments on mandatory climate risk reporting. After all, it’s worth remembering that the SEC serves the interests of businesses and investors.