The COVID situation, with its profound impact on the communities and economies worldwide, has set in stone the immediacy to be sustainable. But even a few years before its onset, the mainstreaming of the environmental, social, and governance-related disclosures has continued, albeit at a varying tempo. With investors demanding more transparency, policymakers insisting on greater accountability, and an ever-conscious consumer looking for emphatic brands, corporate conduct towards community and the environment has increasingly occupied a front seat in Boardroom debates. However, with less than a decade left to attain the stated UN Sustainable Development Goals (SDGs), an uneven disclosure and reporting landscape seems to still be consistently undercutting the fundamental sustainability objectives behind Environmental, Social, and Global (ESG) compliance.
For ESG investments, the year 2020 has been remarkably bullish. Buoyed by heightened investor consciousness in the wake of a global pandemic, ESG funds pulled in a whopping US $51 billion in 2020, dwarfing the aggregate of US $21.4 billion in 2019 and US $5.4 billion in 2018. Liberal administration under the leadership of President Joe Biden, resolutely focused on issues like climate change, will also help ESG sentiments gain traction. But, while the tailwind on the ESG adherence seems to be blowing fairer than ever, is this only one side of the story?
For ESG investments, the year 2020 has been remarkably bullish. Buoyed by heightened investor consciousness in the wake of a global pandemic, ESG funds pulled in a whopping US $51 billion in 2020, dwarfing the aggregate of US $21.4 billion in 2019 and US $5.4 billion in 2018
In June 2020, the Investor Advisory Committee, established under the Dodd-Frank Act, reported startling revelations. This committee is one of the US Securities and Exchange Commission (SEC) committees to advise the US market regulator on its core oversight priorities, disclosure integrity, investor protection measures, and other vital interests, representing relevant stakeholder groups. Engaging coherently with various market participants, it found that the lack of unified standards and a piecemeal approach to ESG disclosure have created a breeding ground for the third-party rating entities. The increase in benchmarks, inconsistent research methodologies and superficial comparison have created loopholes in the reporting landscape big enough for elemental ESG considerations to slip through. The Journal of Applied Corporate Finance in 2019 even published a report that echoes such market-wide inconsistencies that undermine the reliability of the ESG-metrics being used today.
Fortunately, the growing apprehension and an even greater sensibility amongst stakeholders regarding the overwhelming perils of decentralised and dubious ESG reporting practices has led to a call for action on globally accepted and standardised ESG reporting. The Singapore Exchange conducted a survey on ESG disclosures by the listed entities which reflected several apparent concerns of securities issuers regarding variations in the ESG risk assessment criteria and frameworks, particularly those around greenhouse gas (GHG) emissions.
These reports prove that this assumed threat is very real. At the same time, a collective response has been affirmative, and there has been considerable progress over the last year.
The Chartered Financial Analysts Institute launched a feasibility study to investigate standardising the interpretation of ESG financial products, acknowledging the inherent relationship of value creation with sustainability performance of organisations. The panel collaborating on this includes sustainability reporting pioneers like the Carbon Disclosure Project (CDP), the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), and the Sustainability Accounting Standards Board (SASB). At the supranational level, World Economic Forum’s International Business Council brought the Big Four (Deloitte, Ernst and Young, KPMG, and PwC) in a concerted effort to harmonise and codify corporate reporting around their ESG performance. Similarly, the International Financial Reporting Standards Foundation (IFRS Foundation) has embarked on an initiative to set comparable and relatable metrics of sustainability that will be universally applicable and valid.
So while there is movement on defining global ESG standards, swift action is needed to ensure that this alleged threat does not dampen decades of progress and advocacy on ESG and to ensure that the action taken makes a difference.
In setting common ESG reporting standards which are relevant and comprehensive, we need to ensure they look beyond the conventional domain of financial materiality. Here, the standards may have to venture into the highly debated realms of ‘Double Materiality’ that not only recognise the responsibility of the organisation to report on the financially pertinent topics but also on issues that impact communities and the planet. Secondly, to make effective benchmarking and comparison possible, the standards will have to collate various sustainability benchmarks into universally accepted ESG reporting metrics. While this is feasible, it will require significant investments in terms of knowledge transfer and technology. Also, a thorough comprehension of the geopolitical peculiarities, economic conditions, and cultural nuances of the regions will need to be taken into consideration to contextualise ESG disclosures around the globe.
In setting common ESG reporting standards which are relevant and comprehensive, we need to ensure they look beyond the conventional domain of financial materiality. Here, the standards may have to venture into the highly debated realms of ‘Double Materiality’ that not only recognise the responsibility of the organisation to report on the financially pertinent topics but also on issues that impact communities and the planet
The need of the hour is to bring regulatory sanction, corporate will, and social insights into a single box under the aegis of a supranational entity that can encourage compliance and ensure a progressive ESG culture. Sovereign leadership and legislative thrust are crucial to deliver the right impulse to trigger the synergy and the oversight necessary to ensure broad-based ESG compliance.
For instance, the way ESG culture is being driven in Europe and the US exemplifies this multi-stakeholder model, albeit at a localised level. National governments set goals and deliver the necessary facilitations to push ESG adherence beyond mere green-washing exercises, driving demonstrable and verifiable results towards a sustainable future. Such cultures now need to be elevated and consolidated at a global scale through aid and knowledge transfer to help developing nations cope with transitions within a set timeframe. The mechanism can replicate the success of the International Labour Standards by the ILO, where governments ratify the conventions and execute the required legislative adjustments to enforce them within their borders. At the socioeconomic strata, the businesses steer the respective policy shifts to remain compliant, assisted by the civil society that acts as a moral yardstick for both the public and the private sector.
While ESG is a revolutionary tool to facilitate and guarantee an impactful leap towards a sustainable future, its potential remains underexplored primarily owing to its fragmented disclosure. However, in a world where irreversible climate change, economic disparities, and social divergence are real, there should be little place for ineptitude and complacency. Today, there is a desperate need to propagate the ideals of common and harmonised ESG principles with the same zeal and fortitude that the world once manifested in embracing the Universal Declaration of Human Rights. Action matters now more than ever!
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Akanksha Sharma is an International Development and Public Policy Specialist. She has been recognised as the 'Most Impactful CSR Leaders Globally' 'Asias Top Sustainability Leaders' ...
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