European fiduciary duty consultation red-flags failure of ESG disclosure standards

‘Competing standards create noise’

Stakeholder responses to a European Commission consultation on fiduciary duty, which stems from the recommendations from the EU’s High-Level Expert Group on Sustainable Finance (HLEG), have underscored deficiencies in non-financial reporting and ESG disclosures.

The EC consultation “on institutional investors and asset managers’ duties regarding sustainability” closed on 28 January and received 193 responses.

As EC Vice President Valdis Dombrovskis said at the release of the HLEG’s final report on 31 January: “We will present a proposal on fiduciary duty. It will clarify the need to take sustainability into account when managing money for others”.

RI understands that the results of the consultation will inform the EC’s upcoming Action Plan, as well as any possible legislative actions that would follow.

Some of the questions sought input on the quality of ESG disclosures and metrics available “to perform sustainability risk assessments” of investee companies, with almost 70% of respondents saying current corporate disclosures don’t provide adequate information.

BlackRock stated that the take-up of sustainability-related issues by investors is hampered by the lack of clear, consistent standards for the reporting of material ESG data by companies.

It wrote that “the numerous and competing standards” create a “lack of consistent and clear data”.

Instead of clarity about the ESG risks and opportunities for investors, it generates “noise that can obfuscate a clear picture of material sustainability considerations.”

BlackRock added: “We would be very pleased to see […] greater standardisation of reporting frameworks.”

Similarly, Accountancy Europe, the federation of professional bodies, recommended the “significant proliferation of initiatives” in this field be addressed.

“It is now time to take steps to bring non-financial information to ‘investment grade’ level” through greater coordination between “the different standard setting bodies and initiatives…and support from the regulatory community.”

The final step, Accountancy Europe continued, should be “a single global framework for non-financial information reporting” whose underpinning principles “should be comparable to […] the IFRS Standards”.

Accountancy Europe added: “A more prominent role in broader corporate reporting would allow the IASB [International Accounting Standards Board] to stay at the forefront of corporate reporting developments and to maintain the relevance of its Standards.”

A spokesperson for the IASB told RI that in relation to “wider corporate reporting”, the standard-setter body will not go beyond updating the IFRS Practice Statement Management Commentary (which complements financial statements by providing other financial information).

Campaign group ShareAction said current corporate reporting presents a number of gaps that leads to inadequate risk assessments.

“The overarching limitation is a lack of standardisation of reporting frameworks, which discourages comparability and impedes stock selection and securities valuation based on sustainability factors,” it stated.ShareAction suggested that “a ‘minimum standards’ approach would satisfy the need for flexibility as well as respond the confusion created by lack of cohesive guidance”, which is “a barrier to sustainable investment.”

The Principles for Responsible Investment stated that ESG factors “should be treated consistently with traditional financial reporting”.

The PRI said it welcomed the Non-Financial Reporting Directive, however noted the following issues remain, among others: lack of timely ESG data treated as market sensitive; limited forward-looking data linked to long-term value creation; and lack of quality and veracity of information reported.

The CFA Institute stated in its response that the quality of ESG could improve as “much of the language is boilerplate” and “decision useful information is typically inadequate.”

However, it advocates for “a global market led solution” and investors being “allowed to develop and apply their approach to ESG assessments” — like for any other investment decisions.

Similarly, Assogestioni, the Italian asset management industry body, stated that “standardization at EU level should occur [to] enable asset managers quantify the impact of the ESG performance of the investee company on their portfolios.”

Assogestioni, nonetheless, is in favour of a market driven approach developed by industry and investors. Otherwise, “the rush to regulate this market too quickly will stifle innovation”, and it would “run the risk of being seen as a tick box compliance exercise [leading to] “green-washing”.

When it comes to the E, of the ESG factors, many respondents encouraged the adoption of the Task Force on Climate-related Financial Disclosures recommendations.

UNI Europa, the European trade union federation, responded that ESG disclosures should be mandatory, particularly on the social aspects of sustainability reporting.

“There is hardly any [social] reporting standards and companies end up highlighting the good work they do in different communities, while glossing over the issues with strikes and breaches of health and safety they may have.”

In addition, close to 90% of respondents to the consultation said investors should also disclose how ESG factors are considered within their decision-making.

The International Corporate Governance Network answered that “best practice stewardship involves public disclosure of how investors look at sustainability issues”.

The Dutch corporate governance platform Eumedion noted that such transparency in investment decision-making is part of the Shareholders Rights Directive II, when it “asks institutional investors to disclose an engagement policy including how non-financial performance of investee companies is monitored”.