Environmental, social and governance (ESG) risks are being incorporated into management, as well as investment, decision-making - whether it's lending decisions, equity investing, green bonds, or anything else, says Neil Stewart, Director of Corporate Outreach at the Sustainability Accounting Standards Board (SASB).
“Value creation, its preservation or erosion as a result of these ESG risks is now being quantified,” says Stewart, “and so too is corporate performance against these risks. This is what puts the accounting profession at the centre of this ESG world.”
SASB is an independent non-profit organisation that sets industry-specific standards to guide the disclosure of financially material sustainability information by companies to their investors. Stewart concedes that, until now, reporting on ESG risks has been a somewhat complicated process, with many types of users—including investors, civil society, and policymakers—requesting different types of ESG information. No single standard or framework can meet these varied needs. SASB is designed to help provide investors with the ESG disclosure they need to inform investment decisions.
“Investors are demanding ESG data from companies, and they're demanding that it is consistent, comparable and reliable,” says Stewart. “On the one hand, investors are looking for investment performance. On the other hand, they need to assess and report on their portfolios – and increasingly they need to assess and report on their portfolios to regulators.” The bottom line is that investors need data on companies’ ESG targets and performance – and, of course, companies need it too.
Stewart points out that investors are increasingly seeking this data directly from companies. “In the past, they might have relied on third-party research firms and ratings agencies but now they increasingly want this data directly from companies. This means companies need to take control of their story,” he says. “If they don't take control of their story, if they don't report this data, then a portfolio manager, an index provider or a ratings firm will still draw a conclusion about the company’s ESG performance, but outside of the company's control.”
While the guidance to companies to control their story and data is clear, there is perhaps a more pressing rationale for companies and their trusted advisors to understand how to report in this area: mandatory ESG reporting is coming.
“It’s coming and it’s coming really fast,” he confirms, adding that the European Commission and the IFRS Foundation are just two examples of organisations taking significant action around ESG disclosures. In November 2020, the UK government announced its intention to require climate-risk disclosures across seven key sectors of the UK economy by 2025. In the interim, the UK Financial Reporting Council (FRC) has encouraged UK public interest entities to voluntarily report using the TCFD Recommendations and SASB Standards:
“In order to meet the ambition of UK stakeholders to improve the quantity and quality of climate-related and wider environmental, social and governance reporting, we believe some of the existing frameworks can act as steps in supporting the market to move more quickly to meet the information needs of investors and other capital providers. The FRC therefore encourages UK public interest entities voluntarily to report against the Task Force on Climate-related Financial Disclosures’ (TCFD) 11 recommended disclosures and, with reference to their sector, using the Sustainability Accounting Standards Board (SASB) metrics. We encourage companies to reporting on these areas within their next reporting cycle, where possible, and disclosure should be considered in the context of the existing strategic reporting framework in the UK.” (Source: FRC Climate Thematic - How are companies developing their reporting on climate-related challenges?)
What will all this mean for companies? “When ESG reporting becomes mandatory, this will mean increasing involvement of internal audit, as well as external audit, to ensure credibility, trust and reliability of data,” says Stewart.
And what is SASB’s role in all this? “We provide the tools to identify, assess and report on material ESG issues. SASB Standards are a core solution for ESG reporting worldwide and they’re attractive to accountants because they include suitable criteria for assurance, and the structure that internal and external auditors need to make this data trustworthy and credible for the user,” he responds.
True, there may well be many ESG reporting frameworks and standards to conjure with. However, many are complementary and can be used together: frameworks simply comprise high-level principles, and standards have disclosure topics and metrics. What is needed – and is being put into place now – are the rules on how to structure ESG information in order to report on it.
“And that is the point,” says Stewart. “Standards provide that structure and ‘decision-usefulness’ for management and investors. Part of that ‘decision-usefulness’ is reliability and a guide to what's financially material to companies.” He points out that all of the SASB metrics are selected to be verifiable, and that is key for accountants.
The rapid rise of ESG reporting can be demonstrated from SASB take-up alone. This particular standard-setter was founded a decade ago and codified its standards at the end of 2018. Now, more than 900 reporters worldwide are reporting to SASB standards, with more than 100 new reporters are coming on board each month.
“What’s remarkable is that, although SASB standards are still perceived sometimes as being quite US-oriented, in fact we're used globally, and currently we're seeing the proportion of non-US reporters increase rapidly,” Stewart says. “On the investor side, SASB has tremendous investor support. I think it would be fair to say that investor attention is coalescing around SASB and TCFD disclosures.” The situation is very much aligned, he says, with what the FRC has told UK companies: for climate risk, use the TCFD framework for disclosures, and for industry-specific risks, use SASB standards.
In fact, there are over 200 investors, asset managers and asset owners who have built SASB standards into their investment processes. “We’re seeing SASB become part of the infrastructure of the capital markets,” says Stewart.
To help companies understand how to build the internal controls and governance systems to gather data to feed into the ESG reporting process, ICAEW, SASB and the World Business Council for Sustainable Development are running the ‘ESG Reporting Roadshow: investor-grade ESG reporting and assurance’ on 11 May 2021. The event will also help with practical guidance for the accountancy profession, as well as sustainability practitioners, to gear up for expected mandatory ESG reporting.
“We now recognise the enormous percentage of corporate value which is intangible,” says Stewart. “Non-financial and financial reporting is all very much connected.”
You can find out more about the topics raised in the article at the ESG Roadshow Hosted by ICAEW, SASB and WBCSD. The webinar is at 10.30am (BST) on 11 May 2021.
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