Have you ever noticed that the language of sustainable investment is rife with acronyms? In my opinion, 2020 will see some of the worst tongue-twisters become popularized parlance.
Yet an increase in investors learning these bad alphabet jumbles will be a good thing as it will reflect increasing consensus on what’s important in the rapidly changing world of sustainability.
Will 2020 bring a growing consensus that ESG factors (e.g., greenhouse gas emissions, child labour, cybersecurity) are not all equal? In my opinion, environmental challenges are most pressing and climate change takes top spot.
PRI makes certain TCFD reporting mandatory
The Task Force on Climate-Related Financial Disclosures, known commonly as the TCFD, is a uniform reporting format on climate change-centric issues with elements covering governance, strategy and risk management. Although the final report was released in 2017, adoption of this targeted form of ESG reporting has been slow. In comparison to better-known reporting formats, such as the Global Reporting Initiative, which was mentioned in about 60 per cent of U.S. corporate reports on ESG, the TCFD was mentioned in only 10 per cent of reports, according to a report published by law firm Shearman & Sterling in September 2019.
However, the TCFD is now positioned for a significant uptick in adoption as signatories to the United Nations-supported Principles for Responsible Investments must include some TCFD-based indicators in their 2020 reports.
With more than 2,600 asset owners and investment managers as signatories, the PRI plays a key role in formalizing and standardizing ESG reporting. The fact that PRI chose to use the TCFD shows support for this framework. “It is increasingly important for investors to incorporate emerging mega risks such as climate change into their view of the future,” said Fiona Reynolds, chief executive officer of the PRI, in a press release. “TCFD provides the best available framework for systematically including climate-related risks and opportunities into investment strategy. The PRI is pleased to further incorporate TCFD into our reporting framework and continues to be a strong supporter of the task force’s recommendations.”
Part of the PRI’s popularity to date has likely been due to the relative ease of its reporting requirements. Yet providing reporting on some of the recommended TCFD criteria in this year’s PRI report will be a technical challenge as it pushes signatories to focus on how climate change could affect their organizations and investments. This will involve indicating climate risk and opportunities that are incorporated into investment strategies and products within the organizations’ time horizon as well as reporting on the organization’s approach to scenario analysis.
As investors are increasingly focused on potential climate-change impacts, the 2020 PRI reports will be a welcome source of new information. In addition, as what gets measured gets managed, there’s likely to be a virtuous feedback loop between identifying risks or weaknesses created by climate change and taking action to address them.
The PRI’s leadership with respect to TCFD reporting will likely serve as a stepping stone toward wider adoption.
SASB gains “material” momentum
Another development on the sustainability reporting front occurred when the Sustainability Accounting Standards Board, known as SASB, acknowledged that all possible ESG factors are not equal when it comes to financial materiality.
In 2018, the SASB published ESG factors for each of 77 industries that are material to financial performance, and therefore are worth reporting on. For instance, while greenhouse gas emissions are material to most industrial groups, customer privacy is only important to a small subset of industries.
This type of format may be the answer to greenwashing, whereby some companies report on any and every ESG factor they can lay claim to. Rather, by focusing only on what is important, SASB reporting clearly measures ESG impacts and makes the information directly comparable to other companies in the same industry, as well as between industries.
This development out of SASB is significant considering it has an impressive number of companies reporting according to its standards.
And in 2019, SASB along with the Climate Standards Disclosure Board, introduced a reporting guide on TCDF implementation that takes into account SASB standards and the CSDB framework to provide a ‘how-to’ for putting the principles of the TCDF recommendations into practice.
Making sense of the alphabet soup
Over the past years, as sustainability has moved into the investment mainstream, a myriad of different reporting formats, indices and organizations – a real alphabet soup of ESG – was created. These competing interests all have the goal of increasing information, but the result has been inconsistency and lack of comparability – not to mention an army of employees and consultants who tabulate requested information and fill in all kinds of reports.
In my opinion, industry support for a small number of widely-accepted reporting formats and metrics, including the PRI, TCFD and SASB, will improve this situation in 2020.
While it would have been nice if acronyms for these new formats had been developed by marketing experts rather than accountants and financial experts, it didn’t happen, so expect to be spouting off tongue-twisters in your ESG-related discussions in 2020.