Inconsistencies in ESG reporting between corporates and across sectors are widely known. This patchwork quilt of reporting mirrors the array of frameworks and standards for corporate sustainability reporting.
In parallel, the range of external ESG scoring methodologies, and how these sometimes produce contrasting results, is also widely known.
In this report we shine a light on inconsistencies in reporting, contrasting the approaches of two oil and gas companies. We outline reasons why ExxonMobil’s annual reports and climate statements, unsurprisingly to many, are seen as among the least user friendly, cursory, difficult to read and hard to find, and precisely why Equinor’s reporting is rated more highly. Fragmented approaches to sustainability reporting and standards allows corporates to window dress and prevents investors from making informed allocation decisions.
So much for the diagnosis. What needs to be done?
First, as Martijn Bos of the Dutch corporate governance network Eumedeon says: “We don’t need another framework, we need a global authority.” To this end, September’s proposal for a Sustainability Standards Board, under the auspices of the International Financial Reporting Standards Foundation (IFRS) and alongside the International Accounting Standards Board, was seen as a breakthrough. Immediate calls for pragmatic integration with the existing leading sustainability standard setters were predictable as much as they were welcome, and should be heeded.
The IFRS foundation’s proposal came a few weeks after four leading sustainability standard setters – the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the CDP (formerly the Carbon Disclosure Project) and the Climate Disclosure Standards Board (CDSB), together with the International Integrated Reporting Council (IIRC) – announced their intention to produce a more coherent and comprehensive global corporate reporting system. The International Business Council of the World Economic Forum is also working on common metrics and recommended disclosures.
Second, corporate reporting (and that of asset managers to institutional investors) needs to improve to keep pace with the reporting demands of the institutional investors themselves. Here, the EU’s Sustainable Finance Disclosure Regulation is notable, and the UK has proposed mandatory reporting according to the TCFD (Taskforce for Climate Related Financial Disclosures) for pension schemes.
Third, it is hard to imagine better ESG reporting without at least beginning to reimagine corporate reporting itself. While the concept of materiality is recognised, and is embedded in the frameworks of the likes of the GRI and SASB, it does have limitations. Donato Calace of the London-based software provider Datamaran has a vision that cuts through prescriptive definitions of materiality. As Christoph Biehl and his co-authors outline in this report, a risk-based, data-driven approach to materiality can help investors and others to look through corporate reporting to extract what is relevant to them.
Fourth, none of this is a panacea. Integrated and consistent sustainability reporting will be a breakthrough but it can only take investors so far. It can and will help them more accurately measure and report on externalities, as well as better allocate capital. More standardised reporting should also allow external ESG ratings to become more consistent. But external ESG ratings will always have limitations, just as credit ratings are not foolproof. For active investors, there is no substitute for proper due diligence, be that in fundamental equity investing, credit or in ESG. Better reporting could also give active investors more of an edge.
Harmonised standards, together with top-down regulatory pressure and bottom-up peer group and investor pressure, should all work to improve ESG reporting by corporates. But standards are no substitute for real action by company boards to improve environmental, social and governance outcomes.
Finally, as long as there are corporate leaders and laggards, there will always be a role for engagement and focus on real-world ESG outcomes over the timeframes that long-term investors care about.
Liam Kennedy, Editor, IPE
Not another framework….
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Not another framework….