Two things are essential to the development of globally recognized standards for environmental, social, and governance (ESG) disclosure: greater U.S. participation and stronger regulatory guidance.
That is the general consensus expressed by the experts who recently participated in the Sustainability Accounting Standards Board (SASB) Symposium 2020, a virtual conference that brought together leading CEOs of investment firms and other industry representatives from around the world.
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The speakers agreed that ESG issues can pose material risks to investors and that markets must find a way to highlight these risks
In a panel discussion on non-financial disclosure, Erkki Liikanen, Chairman of the Board of the IFRS Foundation, said the time has come to address the fragmentation of ESG data and reporting. “We can no longer ignore this issue,” he said.
At the same panel, Alain Deckers of the European Commission noted that preventing greenwashing and confusion over disclosure requirements is paramount.
Erik Thedéen, chairman of the working group on sustainable financing of the International Organization of Securities Commissions, hypothesized that part of the reason the European Union seems to be so far ahead of the rest of the world on this issue is because “the United States is lagging behind.”
“The United States is not on board, so it is difficult to envisage a global solution,” he said. “Japan and Europe may agree, but the U.S. has to be on board.”
The global community is stepping up its actions, he noted, so it would be encouraging if the new U.S. administration is as “forward-looking” as it claims.
Former Securities and Exchange Commission (SEC) Chairman Mary Shapiro, who moderated the panel on non-financial disclosure, pointed out that the US regulator had not produced guidelines on climate risk disclosure since 2010.
As to whether the Biden administration will be a “team player”, panelist Allison Lee, SEC Commissioner since 2019, suggested that ESG issues are “critical” and that “the [SEC] needs to become more involved – and quickly.”
This message echoed the one she made in a January public intervention, when she lamented how the agency had chosen “to ignore the challenge of climate change risk disclosure rather than begin the difficult process required to address it.
During the roundtable discussion, Lee added: “We have learned a lot [since 2010] about climate change risks, and there has been a lot of progress in terms of the number of companies producing climate-related information. She attributed this to both past U.S. guidance and the ongoing work of groups such as the Task Force on Climate-Related Financial Reporting (TCFD) and the SASB.
Looking ahead, Allison Lee believes that “we have reached a sort of tipping point in terms of the effectiveness of a voluntary ESG disclosure regime. We have many specific demands from investors and evaluators, and issuers are currently producing information that is both competing and contradictory.”
In order to create standardized and reliable ESG and financial data, Allison Lee believes that regulators such as the SEC need to coordinate. “We could eventually integrate these data through a broad disclosure effort that would also recognize, as the TCFD and SASB do, the considerable differences between sectors and industries.”
Going down this road won’t be easy, she agreed, but there is already regulatory work being done globally and this will help the United States catch up and respond adequately to investor demand.
For all markets, however, the issue that remains topical is the multiplication of names and nomenclatures used in the ESG space.
This “creates problems for issuers, preparers [of financial reports] and investors,” Alain Deckers pointed out. Even the term “non-financial disclosure” has recently been called into question, as it seems to dissociate ESG issues from their financial impact.
In the main conference discussion, CFA Institute President and CEO Margaret Franklin and State Street Global Advisors President and CEO Cyrus Taraporevala stressed that the continuing confusion over industry standards will only “open doors for those who don’t believe in ESG issues.”
Nevertheless, Cyrus Taraporevala identified three encouraging trends: the growing awareness of the increasing correlation between ESG risks and performance; the increasing knowledge of investors; and the increased involvement of regulators such as the SEC.
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