Citi's ESG specialist Anita McBain highlights that as ESG investing has grown in prominence, a transparent measurement and disclosure practice of sustainability performance is now considered a fundamental part of effective corporate oversight and governance – and one that is increasingly demanded by investors. Complexities in reporting are evident, but the statement by ‘The Five’ aims to address this issue with a more transparent and shared baseline to enable greater sector comparisons and risk evaluation.
Two Key Concepts
- “Single materiality is what investors and companies care about for enterprise value creation.”
- “Double materiality refers to positive and/or negative externalities on the environment or society created by a company's operations, products and services.”
Current disclosure standards have created a high-quality foundation on which ESG scoring metrics can be built. However, in order to progress this initial conception, 'The Five' advocate for more consistent and dependable data, stressing that this would address concerns regarding confusion and cost and as a result encourage quality reporting from individual companies.
ESG in Europe – The evolving regulatory landscape, having enforced mandated sustainability-related reporting, is evidence of emerging ESG awareness and adaptation of ESG strategies into investment attitudes, which is reflective of growing investor demand across equities, fixed income and multi-asset strategies. Sustainable development has been a fundamental objective of the EU over the last 20 years, as mainstreamed via legislation such as EU Sustainable Development Strategy/EU 2020 Strategy and so on, and is expected to remain prominent in implementing the 2030 Agenda and SDGs – giving the EU a prime position in mandating the adoption of sustainability standards.
The IFRS Consultation Paper – Closed in December 2020, the paper outlined the proposal for improved disclosure of climate risk and sustainability indicators. As the demand for ESG-centred solutions increases, the IFRS has stressed the need for verifiable and transparent standards in all financial markets. In this ambition for a newly developed and maintained international agreement of reporting standards, the IFRS proposed the creation of a Sustainability Standards Board (SSB). Some progress already has been made regarding disclosures; the UK is making TCFD-aligned disclosures mandatory across the economy by 2025 (with a proportion mandatory by 2023).
IBC/WEF Stakeholder Capitalism Metrics Initiative – Growing from the World Economic Forum’s long-term commitment to stakeholder capitalism, this initiative is particularly impactful, as it highlights widespread executive support “for consistent reporting of 21 ‘core’ metrics in the categories of Principles of Governance, Planet, People, and Prosperity,’ with a supplemental set of 34 ‘expanded’ metrics in the same categories.”
With regard to approach, though fewer investors focus specifically on biodiversity loss and environmental issues, a number of specialists continue to stress their long-term implications – highlighting the lack of understanding regarding the impacts given the lack of attention from corporates. However, in an avenue very familiar to corporates, 'The Five' have also addressed the potential that sustainability matters could create or erode enterprise value, in order to present potential financial incentive for companies to develop their sustainability reporting processes.
The collective approach is instrumental to the impact that can be achieved across the standardisation of ESG disclosure. With support from bodies such as a new SSB, new reporting requirements can be implemented across global markets, with a climate-first approach leading the way.
For more information on this subject, please see ESG & SRI: A Shared Vision for Sustainability Standards and ESG Frameworks. What Next for Investors?.
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