August 4, 2021
Sr. Director, Center for Capital Markets Competitiveness
When investors choose to fund a business initiative, they should consider the company’s compliance with environmental, social, and governance (ESG) policy. They should weigh the investment’s outcome on the Earth’s environment, the social implications, and the way a company runs.
There have been numerous different standards set around ESG disclosures across economic sectors in recent years. Without clear universal standards, though, it is difficult to assess an investment’s true impact and returns.
Industry experts recently shared their insights on a U.S. Chamber of Commerce panel on the need for better ESG standard-setting, the determination of materiality, and ESG’s connection to climate change.
ESG Standard-Setting Is Currently a ‘Very Chaotic Landscape’
ESG and sustainability investing are gaining traction with a number of independent investors surfacing in the space. The International Financial Reporting Standards Foundation (IFRS) announced in March 2021 that they are attempting to regulate these standards through an International Sustainability Standards Board (ISSB).
While this is a solid first step, there is work to be done within the current climate of ESG standards, noted Jean Rogers, independent board member, investment advisor and founder at Sustainability Accounting Standards Board (SASB).
“These issues manifest very differently from industry to industry,” said Rogers. “It's very challenging to standardize across a group of industries. How I would characterize the space now is chaos, confusion, and conflict.”
“It’s typical of a voluntary landscape that has evolved in response to investor demand,” she continued. “[There are] many different frameworks and standards with different purposes, different stakeholder groups, meeting different types of investor needs…. so what we have is a very chaotic landscape.”
“ESG is subjective, which is why we need standards, reduce the subjectivity and increase the comparability of what information companies are focused on and what investors get,” added Granville Martin, head of U.S. Policy and Outreach at Value Reporting Foundation.
Investors Need Clarity to Determine Materiality
Investors need to know what ESG factors will have a significant impact on a business model. The determination of this materiality differs among sectors and needs to be more clear, said Rogers.
“Investors are swimming in a sea of ESG information,” she said. “It's really not due to the standard centers — it's actually due to the market opportunity and [what] the information brokers and the rating agencies have capitalized on… to meet the investor demands.”
“Investors don't have clarity,” she continued. “They have a sea of data. They don't have clarity on what is material and what companies are actually managing versus what they are disclosing and reporting out in all of these various … channels.”
“The SEC (Security and Exchange Commission) can help investors to… distinguish and come back to those first principles about what is actually material,” explained Rogers. “That is consistent with the SEC’s mission of protecting investors, facilitating capital formation and that [will]… get us to clarity.”
Climate Change Must Be Addressed In Future ESG Frameworks
Climate change is a serious issue that impacts entire economic sectors and industries. It’s important to understand how climate change impacts the current ESG conversation, said Rogers.
“Every company is affected and understanding... how they're transitioning, how they're exposed to weather-related events — we know it's material,” she said. “There were 22 climate-related events last year with over $1 billion in capital destruction, so that's important to understand across the board. Something that's missing from climate disclosure is really understanding what companies are actually investing and are going to need to invest to manage this risk…. and that's really not addressed well in the current frameworks.”
“When I'm investing … I want to know which companies are making those investments either to be future-proof or to turn carbon from… a liability to an asset,” Rogers added. “[Do they want] to get out ahead of a carbon price or just future-proof their supply chain or their exposure?”
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