Amid the tumultuous events of the last 18 months, companies have come under pressure to discuss how they work in the interests of all stakeholders, not just shareholders. At the same time, investors are pushing companies to better explain how Environmental Social Governance (ESG) issues are affecting the bottom line and valuations.
These separate – but closely related – trends are what’s driving the huge proliferation of interest in sustainable investing and disclosure, said Janice Warren, managing director and head of ESG reporting solutions at Nasdaq, “Today we’re seeing this synthesis of interest in values and value. At the outset, ESG interest was more niche, coming from so-called socially responsible investors, and many were driven by values.”
But societal pressure on companies over issues like climate change and diversity has grown rapidly, especially during the pandemic, Warren added, “That really influences what investors are expecting from a disclosure standpoint.”
On the value side, investors and ratings organizations continue to explore how ESG issues affect valuation, building on studies that have shown companies with high ESG scores tend to outperform the market.
“As a former IRO, I remember keenly when one of the key accounting firms came out with a study – ‘The metrics that matter’ – and talked about the huge percentage of value that was unexplained by traditional financial metrics or tangible assets,” said Warren. “Tangible assets used to account for more than 80 percent of value in 1975 and that has shrunk to only 10 percent now. A lot of the intangible value today is related to various ESG metrics and brand value,” Warren said.
Developments In Reporting Frameworks
Of course, one of the results of this focus on values and value is the growth in the number of sustainability reporting frameworks and standards. Companies starting out on their ESG reporting can often feel overwhelmed by the range of options available.
“It’s hard for companies, but there are some leading disclosure frameworks that have emerged,” said Warren. “Certainly, the GRI is very important. In terms of what different investors are asking for, TCFD and SASB are very high on the list. The World Economic Forum is a more recent entrant onto the scene, which is really aggregating what others have felt was important across the ESG spectrum.”
Over the last year, several reporting organizations have worked together to try to consolidate their approach and bring about more alignment in sustainability reporting.
The biggest step so far took place during the recent United Nations Climate Change Conference in Glasgow, UK when the IFRS Foundation announced the creation of the International Sustainability Standards Board (ISSB). The new body will consolidate the Climate Disclosure Standards Board and Value Reporting Foundation, which houses the SASB Standards and the International Integrated Reporting Framework.
“I think we are maturing and laying the groundwork for greater alignment, especially with the recent announcement of the creation of the ISSB,” said Warren. “I remember 20 years ago companies hoped there would be this alignment – they wanted one clear set of disclosure expectations. But I think we are still a long way from that.”
Assess, Act and Disclose
How should companies respond to the growing pressure from investors and other stakeholders over ESG issues? Warren advises issuers to take a three-pronged approach.
“First of all, we need to assess and identify the risks and opportunities that are material and relevant,” she said. “It’s increasingly important to take a ‘double materiality’ perspective, where companies consider their impact on the environment and society, as well as how ESG issues affect their business. Monitoring expectations of ESG raters and frameworks remains central to this analysis.”
“The second thing is the actual doing based on what we’ve learned,” continued Warren. “That includes identifying what we should measure and goal setting. And third, the disclosure itself. I think we are at the point now where companies of all sizes increasingly recognize you’ve got to talk about what you’re wrestling with, knowing that no company has all the answers or does everything right.”
For Warren, the three acts of assessing, doing and disclosing create a reinforcing cycle: “Disclosure leads to more doing, more assessing, and it all iteratively improves your work and makes you a better company,” Warren said.
Amid growing demands for ESG information, the OneReport platform launched in the early 2000s to help issuers manage these information requests from raters and frameworks and to collect, organize and report sustainability information. Acquired by Nasdaq in February 2020, Nasdaq OneReport has witnessed significant growth in user numbers.
“We have been able to double the size of the business annually and continue to build capacity for customer support with a team that is really passionate about sustainability and ESG, wherever a company happens to be in its ESG journey,” said Warren.
A key aspect of OneReport is the way it allows a wide range of colleagues across the company to be part of the information-collecting process, while maintaining oversight and information consistency. Warren added, “Speaking as a former IRO, that is crucial.”