As we await the SEC’s final decision on climate disclosures, companies will continue to gather and report data related to environment, social and governance programs. ESG columnist John Peiserich explores the main drivers of pre-regulatory ESG reporting.
ESG data collecting and reporting is among the fastest changing, most highly watched and most complicated corporate obligations today. Interestingly, in the United States, there is currently no regulatory driver for the obligation, but there will be soon, depending on how the SEC’s proposed rule plays out. Chairman Gary Gensler observed that “investors are looking for consistent, comparable and decision-useful disclosures around climate risk,” and, when there is not a clear regulatory driver, the SEC “should step in when there’s this level of demand for information relevant to investors’ investment decisions.” (Proposed rules were issued in March, and a final decision is expected in the coming months.)
We must wait to see where the SEC lands with its requirements around ESG reporting; meanwhile, over 90% of the S&P 500 and 70% of the Russell 1000 published some sustainability data In 2020 — reporting that is in no way standardized or consistent.
Why is there such an interest in ESG data?
There are two issues driving the increased interest in ESG data: 1) societal demand and 2) risk avoidance. Societal demand has two components, investor demand and consumer demand. Investor demand drives companies’ desire to report ESG, with a reported 10% of fund investments worldwide going into ESG funds. Additionally, investment houses have recognized the demand for ESG-related funds. For example, when BlackRock launched its U.S. Carbon Readiness Transition Fund in 2021, the fund raised a staggering $1.25 billion in a single day. With the increase of benefit corporations tapping into consumer wishes, ESG data and consistent reporting will be important to convert socially conscious shoppers into customers, an obvious benefit to the reporting company.
Risk avoidance
While societal demand is certainly an important driver for companies investing in ESG data and reporting, the greatest benefit may come from risk avoidance. The World Economic Forum conducted a survey of its members finding that of the top 10 economic risks, environmental issues accounted for five of the Top 10 in both likelihood and impact over the next 10 years. Similarly, the U.S. Financial Stability Oversight Council recognized that climate-related economic costs and risk are both expected to increase. In addition to governmental and quasi-governmental recognition that ESG data can predict risk, investors and companies are beginning to understand that ESG data can be a powerful analytical tool.
Parametric insurance, which has long been popular in disaster recovery, is gaining steam as a proxy for proving the effectiveness of ESG programs. Nir Kossovsky and Denise Williamee of insurer Steel City Re explore details of this novel ESG solution.
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Current standards and reporting
After recognizing the need to collect ESG data, companies need to identify the type of data to collect. As referenced by Gensler above, consistent and comparable requirements are needed. There are several excellent ESG standards; European Financial Reporting Advisory Group Sustainability Reporting Board (EFRAG), Global Reporting Initiative (GRI), International Sustainability Standards Board (ISSB) and Sustainability Accounting Standards Board (SASB) are the most frequently utilized.
Nasdaq, recognizing the lack of consistency between the available voluntary standards, has made its “best guess” regarding where ESG reporting lands between investors and Nasdaq companies and published its own voluntary initiative. With the variety of available standards, and large/institutional investors formulating their own data requests to companies, there is significant cost associated with being asked to collect data and report it under more than one of the ESG standards.
The SEC proposal to harmonize the data collection and reporting into a single requirement has the potential to reduce that cost, but once investors and companies travel down one of the available ESG paths, it may only result in duplicative efforts whereby a company reports separately for regulatory purposes and for investment purposes.
Conclusion
ESG will continue to be fast changing, highly watched and complicated. Investors and consumers want consistency in the reporting, and regulatory bodies are moving toward harmonized rules.
John Peiserich is a senior vice president in J.S. Held’s Environmental, Health & Safety — Risk & Compliance group. With over 30 years of experience, John provides consulting and expert services for heavy industry and law firms throughout the country with a focus on oil and gas, energy and public utilities. He has extensive experience evaluating risk associated with potential and ongoing compliance obligations, developing strategies around those obligations, and working to implement a client-focused compliance strategy. He has appointments as an independent monitor through EPA’s Suspension and Debarment Program. John routinely supports clients in a forward-facing role for rulemaking and legislative issues involving energy, environmental, oil and gas, and related issues.
