Lack of standardization is biggest threat to ESG disclosures: research

Rick Steves

A standardized system is thus seen as the biggest threat for the ESG space, but indifference from business leaders, limited checks on greenwashing, and too much regulation were also pointed out as problematic.

A study found that almost half (45%) of valuation experts believe a lack of a standardised and recognised measurement system is the biggest threat to effective environmental, social and governance (ESG) disclosures for businesses.

The survey, conducted by Duff & Phelps, A Kroll Business in partnership with the International Valuation Standards Council (IVSC), highlighted the issues caused by the lack of a standardised system.

Respondents revealed they currently use a wide range of frameworks, with no single system having a clear majority. Amongst those surveyed there were 14 different combinations of frameworks used.

Some of the most popular current ESG frameworks include Global Reporting Initiative (GRI) used by 33% of respondents, Sustainable Accounting Standards Board (SASB) at 32% and Task Force for Climate related Financial Disclosures (TCFD) at 25%.

Andrew Probert, Managing Director, Sustainability Accounting Advisory Services at Duff & Phelps, said: “Today’s results dive into the challenges professionals are facing when it comes to effective ESG reporting. Of the frameworks available, all of which are currently voluntary guidelines, none give a comprehensive overview for ESG reporting, meaning many firms use more than one. With no consistent approach for reporting between firms, it is challenging for stakeholders to compare opportunities fairly and effectively.

“With this in mind, it is no surprise that nearly half of today’s respondents see the lack of standardised and recognised measurement system as the biggest threat to effective ESG disclosures for businesses. The G7 support for the TCFD ESG disclosure frameworks reflects the spirit of the time, but it’s the first step on a very long ladder towards standardisation.

”Until the TCFD, the IFRS Foundation’s Sustainability Accounting Standards or other Government-led regulations such as the European Commission’s Corporate Sustainability Reporting Directive become mandatory, the need for enhanced due diligence, such as carbon audits, supply chain analysis and human rights violation investigations as part of an investment decision making process will only increase. It’s these measures which dig deep to instil confidence in stakeholders to ensure businesses are up-to-date with changing demand.”

A standardized system is thus seen as a priority for the ESG space, but 21% of respondents pointed to indifference from business leaders as the biggest threat to effective ESG disclosures, followed by limited checks on greenwashing (17%) and too much regulation (11%).

Over a third (35%) of respondents said that better reputation was the primary driver for their ESG strategy and investment, while almost a quarter (24%) pointed to an increase in company valuation.

Despite the positive impact on valuation which comes with effective controls, the third most common motivation was a sense of moral obligation (17%).

“There’s a clear consensus that the status quo needs to change, so it is interesting to see many professionals still regard indifference from business leaders as a primary threat to effective ESG disclosures. Hopefully the noises coming out of the G7 leaders’ summit in Carbis Bay will start to alleviate this”, Andrew Probert continued.

“The G7 backing for TCFD is important and if the framework becomes mandatory, it will combat the acknowledged threats of indifference and greenwashing. However, it’s important to remember that TCFD is just a framework, there is still a long way to go to implement comprehensive and standardised guidelines. The TCFD framework is also not without flaws – it’s a climate-first approach and fails to effectively target the social and governance aspects of ESG.

“Without one standardised framework for reporting standards, we will continue to see firms mixing and matching various guidelines, hindering long-term process in the area. We’re still seeing high-profile cases of failed IPOs and increased divestment attributed to poor credentials in all areas of ESG.

“Despite concerns, the increased pressure on industry and government for effective ESG reporting is sparking positive change at all levels. As we look ahead to COP26, we hope to see the proposals from G7 for a mandatory and standardised ESG reporting framework ratified, setting the groundwork for an effective and reliable reporting system moving forward.”

Industry leaders have been increasingly calling for a global framework for ESG investing as the sector faces a massive uptick of inflows and, at the same time, faces accusations of inconsistency in their approach to sustainable impactful investments.

The regulatory landscape must reflect the situation and catch-up to this megatrend as there remains a startling lack of consistency in definitions and data.

A global regulatory framework for ESG investing would provide greater protections for those investors who are looking for profits with purpose and will also help to reduce ‘greenwashing’ – when an investment or company gives an inaccurate impression over its green, socially responsible or corporate credentials.

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