A detailed look at the pluses and minuses of the three major bodies pushing forward corporate reporting.
A recent survey highlighted that CEOs see many barriers to implementing a strategic and company-wide approach to ESG issues, but one of the major hurdles is feeling underwhelmed by investors. As one CEO noted: “Investors sit and listen politely when we bring these issues up, but they really don’t ask about it; we’re not doing this to please shareholders.” Pressure from investors as a factor driving CEOs to act on ESG has remained constant since 2010 at 12%, outstripped by regulation (24%), employee engagement (31%), revenue growth / cost reduction (44%), their own motivation (42%) and customer demand (39%). While global funds managed by RI/SRI/SI groups has increased, CEOs don’t feel any more pressure from investors in relation to ESG issues than they did three years ago. That’s especially confusing when other research shows that only 22% of investors think disclosure on ESG issues is adequate, and only 7% agree that it was sufficient for them to assess materiality. Investors, it seems, are demanding record levels of disclosure of ESG performance and integration. We have a misunderstanding here!
One element of this is a lack of consensus about important ESG issues, which is adding to the confusing – and growing – list of ESG metrics: over 2,000 and rising.
Sustainability Reporting Initiatives
Three European and US groups have laid down some ambitious plans to try to help investors and companies more effectively engage on ESG issues. The International Integrated Reporting Council (IIRC), Sustainability Accounting Standards Board (SASB) and Global Reporting Initiative (GRI) are promoting their sustainability reporting initiatives. They will each have a measure of success, and investors need to be aware of the focus of each group and their relative strengths and weaknesses.
In finance and legal circles (and for mainstream investors), materiality relates to the threshold for disclosure of important, financially significant issues. Failure to disclose certain ‘material’ issues in that sense can lead to the usual litany of consequences including personal liability for directors. For corporate CSR/sustainability teams, ‘materiality’ highlights where ESG issues can have financial consequences with quantifiable value. In that context, proponents have marshalled arguments in favour of disclosing ESG issues in public reports, regardless of whether they meet the traditional materiality thresholds. Materiality (in this new sense of the word) is used to get things on corporate agendas, while the traditional sense is used to take them off, at least in public discourse. Each of the following initiatives uses ‘materiality’ as a term to identify the most relevant ESG issues, but all have distinctly different understandings of the term.
Materiality, Transparency and Comparability
Materiality (in either or both senses) is only one part of the puzzle for investors though. Some investors want transparency on a wide-ranging set of metrics and others want comparability. The usefulness of all three factors will be driven by respective investment strategies. Transparency is probably most useful for negative screening investors. Positive screeners want comparability on a number of relevant metrics, although what they want varies widely. Investors using their own ‘secret recipe’ to determine performance from ESG metrics will want comparability, but on particular metrics. The lack of consistency from sustainability experts is matched by the variety of needs of ‘responsible’ investors. While the jury is still out on the effect of ESG materiality (new sense), investors focused on that factor will be helped somewhat by this trio of initiatives and may still be helped if their focus is on other factors.
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