The evolution and alignment of ESG reporting standards

In addition to an evolving global ESG regulator)' environment, over the past few years we have also witnessed the growing formalisation and evolution of sustainability standards, as well as a trend towards the alignment of those standards. While it can be argued that the current state of sustainability reporting mirrors the state of financial reporting prior to the introduction of the International Financial Reporting Standards (IFRS),' there is an increasing array of non-financial frameworks and certification standards that aim to introduce a more structured and coherent approach for companies to follow in measuring their sustainability performance. Among the most prominent and widely adopted frameworks are:

  • • Global Reporting Initiative (GRI);
  • • Sustainability Accounting Standards Board (SASB);
  • • Climate Disclosure Standards Board (CDSB);
  • • Task Force on Climate-Related Financial Disclosures (TCFD);
  • • Climate Disclosure Project (CDP).

On the other hand, the proliferation of various ESG reporting standards and frameworks arguably serves to add to the inconsistency and disparity of corporate sustainability data today. Given that the overwhelming majority of sustainability reporting is still conducted on a voluntary basis, companies are left to their own devices to determine which framework to follow, which topics are most material to their business, and what format to adopt in disclosing their non-financial metrics. Thus, it is commendable that a number of initiatives have emerged in recent years with the aim of introducing a degree of alignment and harmonisation between the acronym-ridden and jargon-heavy field of sustainability standards that are currently in place. Among these initiatives are the International Integrated Reporting Council (IRRC), as well as the Better Alignment Project.

In view of the high levels of overlap between frameworks, and the growing reporting burden for corporates to comply with a mushrooming number of sustainability disclosure requests, it is a welcome development that such organisations are working on introducing efficiencies into the data reporting process. Developing a systematic methodology that maps the overlapping indicators and enables companies to report in a more streamlined manner is essential in truly mainstreaming the current state of sustainability data and empowering stakeholders to derive actionable insights from ESG information.

From negative screening to positive impact: the sustainable finance pyramid

While negative ESG screening (meaning the screening out of investments in controversial business activities such as fossil fuel, weapons, tobacco, etc.) remains the most widely adopted strategy, we are witnessing the growth of more positive impact-driven approaches to integrating sustainability into investment decisions. Figure 12.4 aptly illustrates the pyramid of sustainable

The sustainable investing pyramid Source

FIGURE 12.4 The sustainable investing pyramid Source: Arabesque investing strategies, evolving from an approach based on ESG factor integration in traditional investment strategies, to one based on screening holdings in or out according to investor preferences, and third - an impact-focused method that identifies investment strategies poised to lead to positive sustainable outcomes (impact investing).

Indeed, the global sustainable development agenda embodied by the United Nations SDGs requires the deployment of a vast amount of capital in order to achieve its objectives of poverty alleviation, universal access to education and health care, tackling climate change and decent employment opportunities, among others. The UN Commission on Trade and Development (UNCTAD) estimates that meeting the SDGs will require US$5 trillion to US$7 trillion in investment each year from 2015 to 2030 (PRI, 2017). This investment gap will have to be filled by public and private sources of capital alike, as well as the conclusion of public-private partnerships between government bodies and the private sector. Indeed, multi-stakeholder collaboration is a crucial element in unlocking the amount of development capital needed to realise the UN Global Goals. The case for sustainable business is clear: an estimated €966 billion opportunity exists for brands that make their sustainability credentials more transparent (Unilever, 2017).

Corporations are increasingly aligning their business and investments with climate commitments - for example, the Climate Action 100+ initiative (including 100 "systemically important emitters”, accounting for two-thirds of annual global industrial emissions)8 and the Global Investor Statement on Climate Change (more than 300 investors with more than US$33 trillion in assets under management have signed on to the initiative).9 Nearly 400 investors representing US$32 trillion in assets under management (AUM) have signed up to the Investor Agenda10 to accelerate and scale up the actions that are critical to tackling climate change.

Yet, defining appropriate measurement mechanisms and quantifiable metrics against which to evaluate companies’ contribution to achieving the SDGs remains challenging. At the core of achieving this transformation will be the drive towards greater corporate data disclosure and transparency.

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