Read a CFA Institute Q&A with Jean Rogers, CEO and founder of the SASB on why investors need sustainability accounting standards.
Key ESG Reporting DevelopmentsThere are several global ESG-related reporting initiatives, including the International Integrated Reporting Council (IIRC) and Global Reporting Initiative (GRI) as well as the Climate Disclosures Standard Board (CDSB), which is associated with the Carbon Disclosure Project. The IIRC’s six-capital (financial, social and relationship, human, intellectual, productive, and natural) integrated reporting framework focuses on value creation and it includes sustainability reporting factors. GRI is primarily focused on sustainability reporting. The CDSB framework sets out principles and requirements for integrating climate change and natural capital information into mainstream reports based on existing accounting requirements.There have also been a variety of country-specific ESG reporting requirements, including requirements from regulators and stock exchanges.
Sign up to Unpacking the Alphabet: Do ESG Reporting Initiatives Meet Investor Needs? on 19 September, a webcast hosted by CFA Institute.European Union Non-Financial Reporting Directive (NFR): On 26 June, the EU issued the NFR, which has been described by some parties as the most important piece of EU legislation. Beginning in 2018, 6000+ companies must ramp up reporting of environmental and social aspects, including respect for human rights and action against corruption and bribery. The pivotal nature of the NFR was emphasised in the influential EU High Level Expert Group on Sustainable Finance Interim Report issued in July. The sustainable finance report calls not only for improved ESG disclosures but also for asset managers to consider the integration of these factors as part of their fiduciary duty.That said, the jury is out on whether there will be a significant change in the quality of companies’ reporting of sustainability factors because the NFR is largely a principles-based reporting framework with no prescribed metrics. In addition, there is not yet a common framework to determine what is material information that warrants reporting. Hence, it is necessary to have ongoing development of best practise examples, as groups such as Accountancy Europe are doing.Financial Stability Board (FSB) Task Force for Climate-Related Financial Disclosures (TCFD): The initial impetus for the TCFD initiative was the perceived failure to link climate change risk to financial stability and long-term risk of financial institutions, including insurance companies. This was described by the Bank of England Governor and FSB Chairman Mark Carney in a 2015 speech on tragedy of horizons. Climate risk has different yet ubiquitous impacts across different industries and the need to mitigate this risk extends beyond the financial sector.The TCFD recognised the need to enhance climate disclosures beyond what is currently reported. On 29 June, the TCFD issued its final report with voluntary recommendations for better reporting and management of climate-related risk.These recommendations are based on a distinction between risks related to (1) the transition to a lower-carbon economy and (2) physical impacts of climate change, as a basis of strategic decision making as well as on informing investors about the implications of climate-related risks.Given that the TCFD recommendations are voluntary, there is an ongoing and complex challenge of ensuring these recommendations are implemented by a critical mass of companies across the globe. The CDSB has a critical role in aiding the rollout of the recommendations. It also helps the cause that the ‘EU High Level Expert Group on Sustainable Finance Interim Report’ has endorsed the TCFD recommendations.