ESG may sound like a PR spin, but you can't dismiss it

Sarah Murray

Promoting the measurement and reporting of ESG performance was once the preserve of a handful of experts and a group of acronym-heavy organisations. Today, however, ESG disclosure is acknowledged as an essential tool in advancing a more sustainable model of capitalism and is even part of the Biden administration’s agenda, with the president last month paving the way for mandatory ESG reporting in the US.

As sustainable investing gains momentum and corporations set ambitious social and environmental goals, ESG measurement and reporting is also something that needs to be grasped by everyone from the chief executive and the chief financial officer to asset managers and pension fund fiduciaries. Yet a question still to be resolved is this: if ESG reporting is to become mandatory, which standards should be used?

Until recently, this would have been tough to answer. Over the past few years, the proliferation of metrics designed to measure everything from corporate diversity in America to the carbon footprint and supply chain ethics of companies operating across the globe has led to what is known as ESG’s “alphabet soup”.

Companies and investors have struggled to navigate a crowded landscape of standards organisations, each with its own acronym and measurement methodology. And while a new industry of ESG ratings providers has emerged, scoring variations between different providers have added to the confusion.

The first efforts to put numbers on capitalism’s social and environmental impact emerged in the late 1990s, when the Global Reporting Initiative (GRI) launched its sustainability-focused reporting guidance.

Over the next decade, the movement gained momentum. Created in 2011, the Sustainability Accounting Standards Board (SASB) in 2018 launched a set of standards covering materiality (issues that are financially material to companies) for 77 different industries. And organisations such as B Lab and the Global Impact Investing Network (GIIN) have developed impact assessment methodologies and taxonomies.

Meanwhile, the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) now have the support of companies with a collective market capitalisation of almost $20tn and financial institutions responsible for $175tn in assets.

Some have decided to go it alone. For example, TPG and the Rise Fund developed a system called the Impact Multiple of Money, later spun off as Y Analytics. And State Street Global Advisors has drawn on data from four leading providers and SASB’s materiality framework in its R-Factor scoring system, which creates ESG scores for more than 6,000 listed companies globally.

One sector has also developed its own ratings system (along with its own acronym). Led by investors, GRESB, or the Global Real Estate Sustainability Benchmark, assesses the sustainability performance of property companies, real estate investment trusts, funds and developers.

Companies and investors could be forgiven for being confused. The good news, however, is that progress is being made on harmonising many of the different standards and metrics, while a global sustainability reporting framework could soon be in place.

In what is an impressive line-up of acronyms, standard setters are starting to collaborate. The “big five” – the GRI, CDP (formerly the Carbon Disclosure Project), the Climate Disclosure Standards Board (CDSB), the International Integrated Reporting Council (IIRC) and SASB – have plans to streamline their reporting standards. B Lab and the GIIN are doing the same.

Meanwhile, all eyes are on the likely launch at the UN’s COP26 climate summit in November of a global Sustainability Standards Board. And with two financial accounting heavyweights behind the initiative, the SSB is gaining plenty of attention.

Developing the SSB is the International Financial Reporting Standards Foundation, the body that promotes international accounting standards, while the International Organization of Securities Commissions (Iosco), the umbrella group for global markets watchdogs, has thrown its support behind the initiative.

The fact that these two organisations are behind the SSB is significant. It was the IFRS Foundation (again with Iosco backing) that two decades ago developed the International Accounting Standards, which are now used by most of the world. Many see the development of the SSB as similarly game-changing initiative.

This is not to say that debates on ESG measurement will end any time soon. As they did 20 years ago, companies may claim that the unique nature of their commercial activities defy standardisation. Countries may argue that it is hard to make comparisons across jurisdictions and between economies that are at different levels of maturity.

Other challenges lie ahead – not least that of applying a framework that is initially being developed for reporting on climate change (the SSB’s first priority) to more complex social issues.

However, as recognition grows that the disclosure of ESG performance needs to be as rigorous as it is for financial performance, the SSB is seen as representing a significant step forward in the work to put capitalism on to a more sustainable footing.

Click here to join the Moral Money Forum, a platform that takes key issues from the ESG debate and opens them up to our subscribers, academic and business experts and asks for their views.