Our Social Invest consultant, Kim Goodall, takes a look at the ESG reporting landscape to help you find your way through the numerous frameworks and standards.
When creating the sustainability reporting standard for the UK social housing sector, The Good Economy noted that “ESG factors would likely form a more fundamental role in the credit process underpinning future investment decisions.”
It’s true: institutional investors such as pension funds and insurance companies have an expectation that ESG is considered alongside more traditional evaluation factors such as the company balance sheet and profit and loss profile. Asset managers describe this process as ESG integration. However, they don’t just refer to one standard or framework, they refer to a range of standards in their assessment.
In this article, we assess the range of standards and frameworks that exist and the harmonisation underway to try to help you to navigate through the maze.
Sticking with measures that apply to property, placemaking and infrastructure sectors, alongside the Sustainability Reporting Standard is GRESB. GRESB is the global ESG standard used by investors and managers alike. The investor-driven global ESG benchmark and reporting framework assesses the performance of real estate funds, REITs, property companies and real estate developers. It also covers infrastructure funds and assets.
But measures extend far beyond the real estate, placemaking and infrastructure sectors. From 1 January 2021, premium listed companies (500 employees plus) in the UK are required to make better disclosures about how climate change affects their business, consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), consisting of UK government departments and regulators. Many large companies are choosing to prepare sustainability reports ahead of time which are publicly available on their websites. The government has expressed a desire to see these standards stretching across the whole economy from 2025.
A further layer of complexity occurs in how we account for climate change in financial statements. It’s a muddy picture which is both complex and hard to navigate for both the corporates trying to prepare the reports and the investors trying to ascertain what they mean. This was highlighted by a review conducted by the Financial Reporting Council at the end of last year. The FRC is the independent regulator in the UK and Ireland responsible for regulating auditors, accountants and actuaries and setting the UK Governance and Stewardship codes. The review noted that whilst companies were providing a narrative on their response to climate change, with a few good exceptions, in many cases this narrative was not carried through to their accounts. If such concerns exist about corporate reporting, one wonders how accurate the valuations are given that the analyst assessment is based on the accounts.
In the absence of a much-needed common framework, the FRC encourages UK public interest entities to report against the TCFD’s 11 recommended disclosures and, with reference to their sector, using the Sustainability Accounting Standards Board (SASB) metrics.
The FRC’s review identifies the important role boards, companies, auditors, professional associations and investors play in considering and responding to climate-related issues; each has the capacity to act as a driver of change.
Joined-up approaches
Next stop on our tour is the stakeholder capitalism metrics and disclosures (SCM), developed in collaboration with Deloitte, EY, KPMG and PwC. These reflect an open consultation process with corporates, investors, standard-setters, NGOs and international organisations, and are designed to provide a common set of existing disclosures that lead towards a coherent and comprehensive global corporate reporting system.
In parallel to this work, the World Economic Forum has also collaborated with the Impact Management Project to bring together the efforts of the five leading independent global framework and standard-setters (CDP, CDSB, GRI, IIRC and SASB) to work towards a comprehensive corporate reporting system with an agreed set of frameworks and standards for corporate reporting.
GRI has been very vocal and has produced evidence that it is the provider of the world’s most widely used standards for sustainability reporting, the GRI standards which it established back in 1997. GRI helps businesses and governments worldwide understand and communicate their impact on critical sustainability issues such as climate change, human rights, governance and social wellbeing.
The International Financial Reporting Standards Foundation (IFRS) has also just announced that it will take the next steps towards the establishment of global sustainability reporting standards, which looks likely to establish a sustainability standards board at the meeting of the United Nations Climate Change Conference COP26 in November 2021.
On 25th January the Bank of England published a comment letter responding to the consultation on sustainability reporting issued by the International Financial Reporting Standards (IFRS) Foundation. This comment letter followed the joint statement issued by the Government-Regulator TCFD taskforce, and reiterates the Bank of England’s support for the IFRS Foundation’s proposal to establish a new sustainability reporting standard setting body.
Finding your way
As companies consider the best way forward, we would suggest there are two parts to their actions. The first, start to gather the data needed by the frameworks and reflect it in reporting. The second, think about the opportunity that ESG reporting represents for your brand, corporate culture and the products and services you offer. Communications with all stakeholders about how you are doing on ESG is expected. Thinking about all of these factors in conjunction will stand you in good stead.
To conclude, if you have made it through the array of different standards above – congratulations. The number of different bodies involved and their various acronyms is confusing which does not help the causes that it is seeking to address. Harmonisation is much needed but not yet available, although there are moves in the right direction.
Adherence to the full variety of standards can be patchy. Social will endeavour to help clients navigate through the maze of standards and regulation through regular updates.
We believe reporting progress against ESG frameworks will help companies reflect the good works that they have been doing and will add value to the bottom line. Where larger companies start, smaller companies follow with an expectation of higher disclosure standards across the board. Social are here to help.
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Kim Goodall is a consultant at Social Invest with extensive experience in asset management, investment banking and financial services.
Social Invest is a communications consultancy helping investors and businesses tell their story and define and amplify their positive social and environmental impact credentials.
For further information about Social Invest please contact Luke Cross at luke.cross@social.co.uk