Toward Enhanced Sustainability Disclosure: Identifying Obstacles to Broader and More Actionable ESG Reporting
As a growing number of investors place increasing importance on corporate performance regarding Environmental/Social/Governance (ESG) issues, the calls to bring order and consistency to corporate sustainability data and disclosure grow louder and more frequent. At present, ESG reporting is marked by significant inconsistency in when, how, and what companies disclose. More specifically, some companies make deep, meaningful disclosures, while others provide little or no disclosure at all. Likewise, some companies follow established ESG methodological protocols, and others report on a self-defined (and often self-serving) basis.
The ESG data and information made public are collected, moreover, by private data companies – including MSCI, Sustainalytics, Bloomberg, ISS/Oekom, Refinitiv and others – and then redistributed (in wide-ranging and often fundamentally inconsistent ways) as sustainability metrics that are sold to the investor marketplace. In light of the manifest inconsistencies and resulting doubt created about the quality and integrity of ESG data, many investors have expressed a need for better corporate sustainability disclosures and are frustrated with the lack of comparability and usefulness of the metrics and information presently available.
In the face of this disclosure disorder, the U.S. Securities and Exchange Commission has been largely silent, leaving it to companies to determine which ESG information to disclose, on what basis, and in what format. In the absence of prescriptive guidance from the SEC, a host of “voluntary” disclosure regimes has emerged – sometimes referred to as an “alphabet soup” of ESG standards. Companies lack meaningful guidance as to which reporting frameworks and standards to follow – and investors are getting no closer to having the carefully structured, consistent, and decision-useful information that they want.
Third-party rating firms (including those listed above and now dozens of others) have taken advantage of this void, sending companies extensive (many would say “burdensome”) questionnaires to complete. Their surveys often solicit information that is not material to the targeted companies or their industries. Companies spend significant time and money responding to these external sustainability surveys, but the data collected and metrics generated by the rating companies are of widely varying quality and aggregated in such disparate ways that investors have little confidence in their comparability, integrity, and utility. As a result, companies are overwhelmed with questionnaires – and investors still do not have the methodologically consistent and investment-grade information they need to properly integrate sustainability risks and opportunities into their portfolio analyses.
This White Paper builds on a survey undertaken by the Yale Initiative on Sustainable Finance of executives from more than 100 public companies – supplemented with extensive interviews with dozens of corporate leaders and outside advisors – aimed at deepening the understanding of corporate ESG reporting practices, challenges, and thinking about how best to track and scorecard corporate sustainability performance. The study and interviews demonstrate the range of reporting practices followed by different companies. They also reveal the desire of many companies for greater clarity and guidance as to which ESG information to disclose and in what formats.
In light of the problems identified, this White Paper proposes the creation of a standardized ESG reporting framework building on the work of the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Taskforce on Climate-related Financial Disclosures (TCFD), and the World Economic Forum (WEF). The proposal calls for mandatory disclosure by all public companies of: (1) a core set of ESG metrics under uniform data collection and indicator construction methodologies, and (2) an additional set of industry-specific disclosure obligations, along with (3) a framework for further reporting on a company-determined basis.
The recommendations also advance a set of four procedural mechanisms to help ensure the quality of the ESG data reported and a commitment to continuous improvement in the information available to investors on corporate sustainability performance. Specifically, the White Paper calls for:
(1) processes to validate the ESG data using assurance mechanisms designed to improve data quality and reliability;
(2) an initiative to harmonize disclosure requirements across jurisdictional borders;
(3) creation of sectoral working groups to refine industry-specific ESG reporting standards – building on the work of the TCFD, CFTC, and SASB; and
(4) training programs for the key people within companies responsible for the production, review, and verification of ESG information as well as their legal and accounting advisors.
In surveying the “state of play” regarding ESG reporting, highlighting the shortcomings that plague the existing patchwork of sustainability metrics, and suggesting a pathway toward a more robust framework for gauging corporate sustainability performance, this White Paper seeks to make it easier for investors to identify corporate sustainability leaders and laggards. Better data and methodologies should increase investor confidence in ESG scorecards and thus help steer capital toward those companies that are constructively responding to society’s profound sustainability challenges – including climate change, water and waste issues, structural inequality, and systemic racial injustice – and away from those enterprises that are not.