Regulators and investors around the world are increasingly pushing for ESG disclosure and reporting. What are the risks and opportunities for your organization, and how can you prepare for the future?
The number of environmental, social, and corporate governance (ESG) regulations and standards globally has nearly doubled in the last five years. Now, momentum is growing for a global baseline standard for sustainability-related reporting — a significant development that will help companies and stakeholders measure social and environmental impact more effectively.
The recent Oxford Analytica and EY report, “The Future of Sustainability Reporting Standards," published in June, outlines five ways companies can best prepare for this new sustainability-focused future. To put the study and ESG trends into perspective, Oxford Analytica’s Isabella Bunn recently sat down with three preeminent leaders in ESG — Ruchi Bhowmik, global vice chair for public policy at EY; Robert Eccles, visiting professor of management practice at the Saïd Business School, University of Oxford; and Gerald Yao, FiscalNote’s chief strategy officer and co-founder.
Bhowmik emphasized that the report’s publication comes at “an extremely dynamic moment” in this space given that the EU, the United States, China, and India all have recently released regulatory agendas or mandates related to ESG requirements. In addition, the International Financial Reporting Standards (IFRS) Foundation — a non-profit that oversees the International Accounting Standards Board — expects to have its International Sustainability Standards Board (ISSB) in place before November. Her critical message? “Don’t wait — the time to act is now, whether it is mandatory standards coming from places like the EU or more voluntary language that we might be seeing in other markets,” she said.
Eccles called the IFRS’s move to establish an ISSB “a monumental step forward” because it will establish a global baseline for sustainability performance. “Investors would have this information to inform their investment decisions and companies could be able to compare themselves,” he said.
The US New ESG Focus Under the Biden Administration
Yao discussed how the Biden Administration is focusing on ESG more than any previous U.S. administration, reversing Trump’s rules and noting that the House passed a package mandating various ESG disclosures. “I think that was the first time a comprehensive sustainability reporting mandate had a floor vote,” he said.
The struggle for various countries to come to achieve a consensus for a global baseline in sustainability reporting will continue to be a challenge. Eccles contrasted the differences between U.S. and EU views of an ESG standard, noting that the U.S. is looking at “What’s the lowest floor we can have?” compared to the EU, with their national strategy for a green economy, focused on “How high can the ceiling be?”
He also contended that the new Non-Financial Reporting Directive (NFRD) sustainability reporting requirements — which will include private and public companies and extend to some 50,000 firms — could have more impact on U.S. companies than they realize, since it would include all U.S. subsidiaries in Europe and could affect their overall business in the EU.
China Likely to be Supportive of a Global Baseline for ESG Standards
Eccles predicted that China’s Ministry of Finance likely will back a global ESG standard. “They realize they need to have good data on the material ESG sustainability issues so they can make investment decisions, create products and formulate strategies,” he adds.
Momentum Growing for a Global Baseline
Eccles emphasized that a global baseline is important because companies operate on a global basis and investors are global. “They need to have an apples-to-apples comparison,” he explained, adding that global securities commissions are motivated to protect investors through transparency and that is why securities regulators around the world share a “collective will” to have this baseline of information.
A simple way to come to this common view, Eccles adds, is agreeing that carbon emissions be included and measured in the same way. “If you can get to what those common issues are — across the different bodies, investors will have what they want — basic data that is comparable.”
Bhowmik agreed, noting that the timing of mid to late next year for several regulatory pushes by the IFRS and ISSB means that there is time for entities to find alignment and common ground. “A lot of pieces are falling into place and the key players at the table are engaging with each other. That is an extremely hopeful note,” she said.
But even if you have a global baseline, it’s not “a silver bullet,” Eccles noted. “It’s not going to make you solve the climate change problem.” He cautioned against confusing standards for reporting with science-based targets such as achieving net-zero emissions by 2050. “Standards enable you to assess your performance but they’re not going to tell you what the performance is and should be.” Eccles also emphasized the important role of NGOs and the role government and public policy play in this environment.
Integrating Sustainability and Finance
The days of finance and sustainability being siloed and separate and often unequal functions will soon end, the panel predicted. And, it will be up to CFOs to step up to embrace this new world.
“What you’re going to need is the same quality of data, the same internal control and measurement systems, and the same quality audits,” said Eccles, comparing this change to what is already occurring between portfolio managers in the investor community raising sustainability issues with CFOs.
Yao agreed, recalling the days when sustainability teams had to create reports without much budget. Today, it’s a “huge cross-functional exercise where your board, your CEO, your general counsel, and your shareholders care about it.”
In terms of how the accounting field is responding to these shifts, Bhowmik pointed toward industry efforts to alleviate the general confusion many companies feel when it comes to sustainability and a lack of clarity or consistency for what is being asked of them. EY and the other Big 4 accounting firms recently worked together through the World Economic Forum International Business Council to develop a core set of metrics that try to simplify what’s required for the “cost of entry” to being more sustainability transparent.
According to a WEF press release, these 21 universal, comparable disclosures focus on people, planet, prosperity, and principles of governance that are considered most critical for business, society, and the planet, and that companies can report on regardless of industry or region. The metrics are signposted from existing standards and metrics and include full implementation of the recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD).
“Over 80 companies have committed to [these principles]. It’s very rare for the profession to work together like that,” Bhowmik said.
In this context, Eccles said that the accounting profession needs to do two things: one; “factor climate into the financial audits they do today even before we have disclosures,” and two; “once we get to standards, we need to get to positive assurance [meaning that it’s been closely examined for accuracy and quality and been validated].”
He further said that investors should be willing to pay to audit ESG information to ensure it is of the same quality, reliability, relevance, and rigor as audits performed today on a company’s financials.
Five Ways companies can prepare for the coming of Global Sustainability Reporting
Bhowmik, Eccles, and Yao shared their tips on how to get ahead on ESG reporting:
1. Don’t wait for sustainability reporting to be mandated
2. Put environmental, social and governance, and sustainability reporting on the board’s agenda
3. Prioritize building trust in sustainability reporting
4. Integrate the finance function
5. Contribute to the process of setting standards
Creating an Ecosystem to Better Track, Report ESG Metrics
FiscalNote works with many CFOs and CIOs to provide a technology platform to automate and connect their data in a more sustainable way, said Yao.
As the world moves toward a common global standard for ESG disclosures, FiscalNote wants to help the broader ecosystem of companies that are underserved but are getting significant pressure from stakeholders across the board to comply with these new regulations around sustainability reporting. “They don’t have the tools to do it as quickly as they would like,” explained Yao.
Noting how it can take years for large global corporations to change their processes and systems and get stakeholder buy-in, Yao said, “It’s best to start now and start early so you’ll get all the benefits.”
He added that there is not a lot of disclosure software tools out there, and “even fewer that are really good.” Many tools come from start-ups.
“We work with consultants, the accounting firms and the legal firms to help set up these companies. Our goal is to help build the technology layer — the ecosystem — with firms like EY that can help connect the data and help companies actually understand what they have within their company to report ESG metrics but do it in a way that is less manual over the long term,” he said.
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