ECGI Policy Watch: Sustainability Standards and Reporting

ECGI Policy Watch: Sustainability Standards and Reporting

September 2023

Welcome to this ECGI Policy Watch blog relating to sustainability reporting. Earlier this past summer we made an appeal to ECGI members to give us their thoughts on the recent International Sustainability Standards Board (ISSB) consultation on agenda priorities, particularly with regard to their newly minted S1 (general sustainability) and S2 (climate-related) reporting standards.

There has been strong support institutionally for the actions of the ISSB to date. This includes regulatory bodies such as International Organisation of Securities Commissions (IOSCO) and the UK’s Financial Conduct Authority, as well as the global investment bodies the International Corporate Governance Network (ICGN) and the Principles for Responsible Investment (PRI). At this point the list of countries likely to adopt ISSB standards in their markets includes Australia, Canada, China, Japan, Kenya, New Zealand, Singapore and the UK.

Notwithstanding this generally positive reception, there are critical observers as well. This version of the blog includes two submissions from commentators who criticise the ISSB for not going far enough, particularly in terms of the ISSB’s narrower focus on single materiality versus the broader double materiality standard that is being employed in the European Union. This is regarded as fundamental weakness, one that Nathan de Arriba-Sellier says ‘does not deliver on its core promise to provide high-quality, reliable and comparable sustainability information meeting the needs of investors and the public. It is also highly unlikely that it will create a global baseline for disclosure requirements, as both the SEC and CSRD have adopted vastly different orientations at odds in their own ways with the ISSB’s.’

In a similar vein, Göttsche et all note ‘sustainability issues often have far-reaching consequences on the lives of individuals, communities, and the planet as a whole. Neglecting the impacts of financially-immaterial issues could lead to overlooking critical social and environmental concerns, undermining the very essence of sustainability reporting.’

Finally, legal scholar Paulo’s Câmara’s discusses what he calls the ‘cascade effect’ relating to the growing ubiquity of ESG reporting standards including not only the ISSB standards, but also taking into consideration sustainability reporting developments in the European Union and the United States. While he sees the positive potential for an ESG ‘cascade’ in terms of influencing ESG awareness and decision making, he also observes that the fundamental differences in approach between ISSB, European Sustainability  Rating Standards (ESRS) and Global Reporting Initiative (GRI) Standards, presents an important obstacle. He underscores the importance of achieving the much-discussed objective of ‘interoperability’, which is easier said than done. Câmara also notes that one of the great challenges of sustainability reporting relates to the limited use by small/medium sized companies (SMEs).

Câmara’s observation about SMEs is borne out in the recently released OECD Corporate Governance Factbook 2023, which contains a revealing graphic to demonstrate the relative disclosure of sustainability reporting by jurisdiction. There are elements of this data that are both encouraging and sobering. The encouraging part is that as a percentage of market capitalisation sustainability reporting represents a significant majority of issuers, at 95% of market capitalisation in Europe, with China at the lowest end at 66%. So sustainability reporting is establishing itself, at least among large cap stocks, as a market norm.  However, the more sobering news is that in terms of numbers of companies, sustainability reporting is clearly not the norm. On a global basis, even though sustainability represents 84% of market cap, only 19% of total companies provide sustainability reports.  

So there remains considerable room for take up of sustainability reporting, particularly by SMEs. While this has relevance in all markets globally including the more ‘advanced’ Europe, it shows that the biggest gap is in emerging markets, now taking shape as the BRICS economies

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By George Dallas, Head of Content at ECGI