The content on this website is intended for investment professionals and institutional asset owners. Individual retail investors should consult with their financial advisers before using any of the content contained on this website. Breckinridge uses cookies to improve user experience. By using our website, you consent to our cookies in accordance with our cookie policy. By clicking “I Agree” and accessing this website, you represent and warrant that you are agreeing to the above statements. In addition, you have read, understood and agree to the terms and conditions of this website. The content on this website is not intended for use or distribution outside of the U.S., unless permitted by applicable law.

ESG

ESG Newsletter published on January 3, 2022

Updated Global ESG Reporting Standards Move Toward More Consistency

Summary

  • Issuers of securities, investors, consumers, and regulators have expressed the need for more consistent environmental, social, and governance (ESG) reporting rules.
  • Advances toward that objective in 2021 include consolidation among non-governmental organizations that promote ESG reporting methodologies.
  • The effort helps to bring greater order to informational demands on issuers and more useful information for other market participants.

Advances in 2021 suggest issuers of investment securities are closer to achieving a goal of more consistent environmental, social and governance (ESG) reporting rules. It is a goal that investors, consumers, and regulators also seek.

While corporate sustainability reporting experienced tremendous growth over the past decade, concerns among market participants persisted. Corporate executives complained of reporting fatigue; citing too many requests for ESG information, surveys to complete, and frameworks to follow.

Meanwhile, investors, consumers, and regulators acknowledged that ESG metrics that are reported according to differing standards can make it more difficult to accurately compare sustainability data. They advocated for broad adherence to standardized reporting methodologies such as those created by the Value Reporting Foundation (VRF, formerly the Sustainability Accounting Standards Board or SASB), the Global Reporting Initiative (GRI), or the Task Force on Climate-Related Financial Disclosures (TCFD).

Study illustrates the value of consistent reporting

A 2019 study underscored the value of consistently reported data. Researchers looking at health and safety data disclosed by a random sample of 50 publicly traded Fortune 500 companies found more than 24 different metrics.

The study concluded that the metrics and methodologies by which they were calculated were unclear and could be confusing. Also, companies would report the same metrics but with different units of measurement. As a result, the data was deemed to have limited usefulness.1

Reporting framework consolidation also supports expanded ESG reporting. For example, 90 percent of S&P 500 companies published a corporate sustainability report (CSR) in 2019, up from 20 percent in 2011.2 Furthermore, the number of companies following the TCFD framework jumped by 1,000 or 62 percent to 2,600 from 2019 to 2020.2

ESG reporting benefits for securities issuers are clear

Beyond the benefits for investors, consumers, and regulators, improving corporate ESG data reporting is beneficial for corporate and municipal security issuers as well. ESG reporting provides management teams and employees an efficient way to communicate about sustainability strategies to internal and external audiences. Reports also can highlight sustainability performance gaps and help focus organizational sustainability efforts.

Corporate sustainability reports offer a dedicated format for articulating a company’s strategy for integrating sustainability into its operations and management’s plan for overseeing important ESG risks. Using the report, management can convey sustainability objectives as well as relevant outcomes. Additionally, if a company’s sustainability initiatives were successful, the report can be used to showcase the results and serve as an effective marketing and public relations tool.3

Corporate sustainability reporting can be used for self-assessment, especially when it reflects a reporting framework such as GRI or VRF/(SASB), spurring self-reflection if the company is unable to disclose the requested metric or if performance trails best practices. The exercise can direct management’s attention to the most relevant and meaningful ESG issues. For example, the GRI reporting framework includes a materiality assessment that can help determine what is most important to internal and external stakeholders.

The role of investors in driving more information and standardization

Investors represent a key stakeholder in developing ESG reporting consistency. The persistent growth in signatories to the Principles for Responsible Investment (PRI) is one sign of rising interest in sustainability information.

Investment managers that sign the PRI commit to its six principles, one of which is the pledge to incorporate ESG considerations into their investment decisions. The number of PRI signatories rose by 29 percent from 2,092 to 2,701 from 2019 to 2020, representing total assets under management exceeding $100 trillion.4

Breckinridge’s ESG integration philosophy is aligned with the United Nations-backed PRI. We became a signatory in 2012.

More progress is needed

Given the insatiable demand for ESG data from stakeholders and the benefits that can accrue to security issuers for reporting it, we believe sustainability reporting along with the adoption of standardized frameworks will continue to grow in popularity in the coming years.

Breckinridge believes that increased transparency and standardization of reporting from issuers can help investors better identify best-in-class issuers.

Separate news reports in 2021 suggested progress toward greater consistency in sustainability reporting. First, the International Integrated Reporting Council (IIRC) and SASB combined in June 2021 to form the Value Reporting Foundation (VRF). The merger provides corporations and investors with a comprehensive sustainability reporting framework.

The consolidation continued in November 2021, as the International Financial Reporting Standards (IFRS) Foundation announced plans to create the International Sustainability Standards Board (ISSB). The IFRS oversees financial reporting across 140 countries. The ISSB will consolidate the VRF and the Climate Disclosures Standards Board (CDSB) to develop global sustainability disclosure standards (See Figure 1).5

Consolidation of various sustainability disclosure organizations with the international standards-setting body recognizes the importance of consistent ESG reporting guidance. It also helps to elevates ESG to carry the same importance as traditional financial standards. Finally, for corporations frustrated by the number of ESG reporting standards and frameworks, the merger helps to simplify ESG reporting.

The ISSB recently announced that it will be chaired by Emmanuel Faber, the former CEO of Danone and a long-time champion of corporate sustainability and ESG disclosure. Once the merger is complete in mid-2022, the new organization will create a “global baseline of sustainability disclosure” that would include cross-industry and industry-specific standards that are expected to incorporate SASB’s work to date. The sustainability disclosure will also reflect the thinking of the World Economic Forum and the TCFD. The IFRS envisions the ISSB sitting between the GRI and financial reporting standards in a nested ecosystem as summarized in Figure 2.

As a long-time member of SASB’s Investor Advisory Group and a signatory of TCFD, Breckinridge endorses the efforts to synthesize the reporting frameworks. Additionally, we will continue to support a broader dialogue about sustainability, ESG integration, and long-term value creation.

 

[1] Governance & Accountability Institute, July 2020

[2] Ex-SEC Head Says Climate Disclosure Support Has ‘Skyrocketed’, Bloomberg Tax, October 2021

[3] “What is a CSR and Why is it Important?” Harvard Business School Online. C. Cote, April 2021

[4] “Enhance our Global Footprint,” PRI Annual Report, March 2020.

[5] “The Biggest Change in Corporate Reporting Since the 1930s: How to Read IFRS Prototype Sustainability and Climate Standards,” Forbes, Mirchandandani, B. November 2021

Rev#278704

DISCLAIMER: The opinions and views expressed are those of Breckinridge Capital Advisors, Inc. They are current as of the date(s) indicated but are subject to change without notice. Any estimates, targets, and projections are based on Breckinridge research, analysis and assumptions. No assurances can be made that any such estimate, target or projection will be accurate; actual results may differ substantially.

Nothing contained herein should be construed or relied upon as financial, legal or tax advice. All investments involve risks, including the loss of principal. Investors should consult with their financial professional before making any investment decisions.

While Breckinridge believes the assessment of ESG criteria can improve overall credit risk analysis, there is no guarantee that integrating ESG analysis will provide improved risk-adjusted returns over any specific time period.

Some information has been taken directly from unaffiliated third-party sources. Breckinridge believes such information is reliable but does not guarantee its accuracy or completeness.