More investors and even corporations are using Environmental, Social, and Governance (ESG) elements to measure a company's performance, and as global awareness of environmental and social issues grows, so has expanded the relevance of ESG reporting.
According to a CFA Institute survey of 900 institutional investors, 3,500 private investors, and 2,800 financial sector professionals worldwide, 85% of investment managers throughout nations are progressively factoring ESG criteria into investment strategies. In Germany, 76% of institutional investors and 81% of private investors are willing to take part in ESG investing or have already positioned themselves properly.
The report says the amount of ESG-linked financing to European corporations has more than tripled from €27bn (US$29.5 billion) in 2017 to €102bn (US$111.5bn) in 2019, showing ESG reporting has become an essential component for corporations.
The state of global ESG reporting standards
Several ESG reporting requirements, including frameworks, national and international regulations, and voluntary standards, have been produced in recent years. Three of the most important ESG standards and frameworks are the Global Reporting Initiative (GRI) Standards, the Task Force on Climate-related Financial Disclosures (TCFD), and the SASB Standards.
Global Reporting Initiative Standards
The GRI Standards include a framework as well as a series of supporting standards that offer a large variety of sustainability matters. The GRI Standards are made up of 34 topic-specific standards as well as the so-called Universal Standards. The Universal Standards require disclosures regarding the organisation's specific context, such as governance, management systems, reporting procedures, products, services, stakeholder participation, and management strategy. Each of the Topic Standards requires a mix of qualitative and quantitative data to be disclosed.
Task Force on Climate-related Financial Disclosures (TCFD)
The TCFD Recommendations establish a framework for climate-related financial disclosures, with the goal of helping consumers understand how reporting companies evaluate climate-related risks and opportunities. The framework is organised into four categories: governance, strategy, risk management, and measurements and targets, with high-level proposed disclosures for each. The TCFD encourages reporting enterprises to conduct and report on climate scenario analysis as part of their risk management and strategy procedures. While the TCFD provides guidelines on the types of information that should be reported, it is based on principles and does not mandate precise metrics for such disclosure. GRI, SASB, and other standard-setters have worked on aligning their standards to the TCFD.
Sustainability Accounting Standards Board (SASB)
The SASB Standards concentrate on the set of sustainability-related risks and opportunities that are most likely to have an impact on a company's financial situation, operating performance, or risk profile.
SASB produces standards for 77 industries in 11 industries. The set of standards outlines the subset of sustainability challenges that SASB believes are fairly likely to have an influence on the financial performance of the average company in an industry. Companies are advised to consult the applicable SASB guidelines for their industry, but it is entirely up to the reporting entity to identify which specific sustainability themes and KPIs are financially material to its organisation.
How SASB works compared to other ESG frameworks
SASB's approach is designed to assist organisations in communicating their external ESG impacts in the language of investors, debt holders, and internal financial stakeholders.
SASB highlights financially material issues, which are things that are reasonably anticipated to significantly influence a company's financial position or operating performance and consequently are essential to investors.
GRI is the most similar to SASB among the other ESG reporting frameworks, but it provides more material information for reporting to all stakeholders.
ESG reporting requirements based on SASB
The SASB Standards are divided into 77 industries in 11 sectors, notably commercial banks. Commercial banks are focused on five issues: Data Security, Financial Inclusion and Capacity Building, Incorporation of ESG Factors in Credit Analysis, Business Ethics, and Systemic Risk Management.
Companies must disclose a total of 12 accounting measures and two activity metrics under these five areas. For instance, the Financial Inclusion and Capacity Building topic comprises the four components below:
- Outstanding loans approved for programs aimed at promoting small companies and community development.
- Past due and nonaccrual loans qualify for programs fostering small businesses and community development.
- No-fee retail checking accounts made available to formerly unbanked or underbanked customers
- People who have taken part in financial literacy projects for unbanked, underbanked, or underserved customers.
Activity measurements contextualise accounting measures by specifying the quantity of activity, allowing accounting metrics to be compared across enterprises of various sizes. The commercial banking industry's two activity indicators are:
- Checking and savings account numbers and values by segment: personal and small business
- Loan volume and value by segment: personal, small business, and corporate.
ESG success is now regarded as an important indicator of a company's health and long-term profitability. Policymakers, investors, financial institutions, and the public at large are increasingly embracing ESG guidelines and reporting standards such as SASB and TCFD to assess competitors and differentiate ESG pioneers from underperformers.