As Investors Take Interest In Corporate Policies, Governments Look To Harmonize ESG Disclosure
November 2, 2021—As employees, consumers and investors demand greater transparency about corporate practices, there’s increasing interest in defining standards for environmental, social and governance (ESG) disclosure.
While the concept of ESG has been around for years, leaders in the both public and private sectors are taking a greater interest in refining the definition. Furthermore, as world leaders try to harness the power of the private sector to reach net-zero goals to stem the warming of the climate, ESG becomes even more useful.
“Financial markets play a significant role in shifting capital to a sustainable future,” Securities and Exchange Commission Acting Chair Allison Herren Lee said on October 22 in a discussion with the Meridian International Center.
Government Regulations & Advice On The Way
In the public sector, for example, the U.S. SEC is considering updating its guidance on disclosure requirements. And the commission is not alone.
Recently, the U.S. Federal Reserve established two committees investigating climate-related risks and planning to consider them as part of its supervision of financial firms. Furthermore, other U.S. agencies taking action include the Commodities Futures Trading Commission, Federal Housing Financing Agency and Treasury Department.
Meanwhile, in late October, the United Kingdom’s Treasury Department published a 48-page “roadmap” for investing in sustainable projects and green technology. Also, the securities regulator for the European Union is developing rules ESG disclosures that will likely come into effect in 2022.
All this comes amid momentum built by the COP26 Climate Conference in Glasgow.
But first, let’s take a step back and start with a definition.
What Is ESG?
For corporations, ESG spans multiple issues including climate change, social policies, and human rights, and health and safety. Some observers would say it goes deeper than that:
“ESG looks at how a company performs as a steward of the earth, how it treats employees, suppliers, customers — and even the communities where it does business. Governance refers to management, the Board, executive pay, audits, internal controls, and shareholder rights.”- Tod Northman and Savannah Fox writing for the Corporate Compliance Insights
It matters because shareholders, employees, and consumers are taking notice. And for many companies, it’s impacting their bottom line.
ESG: It’s A Money Maker
Investors are increasingly taking notice of corporate practices impacting climate, as well as the environment and social policies.
Formal investments in ESG assets are also growing. Last year, 836 investment companies identified themselves as having sustainable assets, according to the Forum for Sustainable and Responsible Investment. That includes 718 mutual funds and 94 exchange-traded funds (ETFs), the organization noted.
In dollar terms, the sector grew by more than 50 percent since 2018, up from $3 trillion to $4.6 trillion in 2020. (This statistic is for investments managed on behalf of individuals, as opposed to institutional investors as a whole.)
Meanwhile, in the United Kingdom, analysts recently made note of increasingly high demand for sustainable products. According to the U.K. Treasury’s roadmap for sustainable investment (mentioned above), as much as 70 percent of the U.K. public “want their money to go towards making a positive difference to people or planet.”
So it’s worth taking a closer look at ESG. And that’s exactly what policymakers are doing.
Consistency of ESG Disclosure
With interest in ESG from investors mounting, financial regulators taking note.
The U.S. Securities and Exchange Commission received hundreds of comments in its quest for information on ESG disclosures by both corporations and the investment funds.
Some large institutions, like banks that serve customers across the world, report ESG disclosures based on multiple frameworks. They include ASEAN’s GRI Framework, standards from the Sustainability Accounting Standards Board, SDG goals by the United Nations, and disclosure reports of their own. For example, TD Bank, an American subsidiary of Canadian multinational Toronto-Dominion Bank, reports on multiple fronts.
Speaking at an event on ESG hosted by Reuters today, Gillian Manning, TD Bank vice president and head of Investor Relations, it takes a lot of the company’s resources to report on multiple fronts.
“I hope there’s a time when there is more of a convergence of standards,” Manning said. “We’ve really been lucky as a very large bank to have the resources to be able to report on all these fronts.”
Teamwork Tackles The Scope Of The Task
In a similar vein, the scope of work within a company is quite vast. Since ESG deals with so many issues, disclosure is often too great a task for a single department.
“ESG impacts so many different areas of the company, whether it’s sales and distribution, corporate secretary, enterprise risk management, you name it. You’re going to need to form a team,” said David Young, Aflac‘s vice president for investor and rating agency relations.
Young added that although the company has been active with ESG disclosure for some time, it is a constant work in progress, especially as government regulators get involved.
“ESG really is an evolution,” said David Young . “And we’re still evolving. We’re evolving with what regulators and others are going to be saying.”
SEC Regulators Aim to Address Gaps
Meanwhile, SEC Acting Chair Allison Herren Lee said increasingly companies are disclosing more information related to climate change. That helps investors understand both the climate-related risks and opportunities for companies. However, not all companies are voluntarily reporting information.
“Our role is focused on investors in capital markets. and when it comes to climate change and the risks and opportunities it presents for businesses, there are a number of places where that intersects with our mission,” Lee said. “Good disclosure of the risks and opportunities that businesses face because of climate change is key to investors”
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