"Investors will have a clearer idea of what they are investing in, and companies can gain from more structured ESG reporting."
Nudge theory
Clearly, however, many companies still need a nudge to make relevant ESG information available to investors. Globally recognized standards will be crucial to investors’ decision-making. Nobody would dispute that a company that understands risk is going to be a better-run company than one that does not. ESG risk is a fundamental part of this equation and if a business fails to pay sufficient attention to it, it is unlikely to be successful in the longer term.
Investors report that, governance aspects aside, the main ESG factors in investment decision-making are related to supply chain, human rights and climate change risks. ESG has now become integral to the investment decision-making process and that is not going to change.
The days of investors looking purely at a company’s yearly or interim financial figures are long gone – the emphasis is as much on the sustainability of the business as it is on a balance sheet. Whether it is fair trade and recruitment practices or the impact of climate change and population growth, they are demanding greater insight into all risk factors.
Company sustainability reports provide this information to some degree, but what is included is largely at the discretion of the business itself. Sometimes the reporting is sketchy, or even promotional in nature. What a global standard would do is provide an essential framework that provides a more meaningful rationale for an investor to buy, hold or sell a stock.
Looking at the broader picture, good practices with regards to transparent and comparable ESG reporting across the board play a key role in trying to build a better working world: a world where the stewardship of the planet’s environment, resources and people will be central to how well business works in the future. Investors will have a clearer idea of what they are investing in, and companies themselves can gain from more structured ESG reporting, as it will help them to identify areas for improvement, which in turn could boost efficiency and productivity.
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"There are undoubtedly challenges, but global standards on nonfinancial information are a realistic proposition."
Taking the lead
For these effective reporting standards to come into being, the recent EY survey of institutional investors suggests that they view national regulators (70%) and international organizations and NGOs (60%) as being best placed to lead the effort.
However, all the relevant parties are not currently pulling in the same direction, and the idea that all national regulators will work together on this and agree on the terms is improbable. What is more likely is that further conversations and collaborations between national organizations (such as the SASB) and international ones (such as the IIRC and GRI) will lead to something workable that companies can adopt.
There are undoubtedly challenges, but global standards on nonfinancial information are a realistic proposition. After all, International Financial Reporting Standards have already set a precedent; they have been widely adopted and recognized as being in all parties’ interests. What’s more, widespread adoption happened relatively quickly – in less than 10 years. If strong foundations can be laid down that work for all the key stakeholders, there’s no reason why something similar couldn’t happen with nonfinancial reporting standards.
Read the fourth EY Climate Change and Sustainability Services survey of institutional investors here.
The views of third parties set out in this article are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.
Summary
There is currently no single globally accepted set of standards for reporting ESG information. But globally recognized standards for nonfinancial reporting make perfect sense. Strong ESG standards give investors a clearer idea of what they are investing in, and companies themselves can also gain from more structured ESG reporting, as it will help them to identify areas for improvement, which in turn could boost efficiency and productivity. Companies that do not comply with globally recognized ESG standards will likely see investors increasingly sell out of their assets. And significantly, these companies will find it harder and more expensive to raise capital.
