Advisory Partners
The FT Moral Money Forum is supported by its advisory partners, High Meadows Institute, a think-tank in Boston, US, and White & Case, an international law firm. They help to fund the reports.
The partners share their business perspective on the forum advisory board. They discuss topics that the forum should cover but the final decision rests with the editorial director. The reports are written by a Financial Times journalist and are editorially independent.
Our partners feature in the following pages. Each profiles their business and offers a view on how we can focus on what matters in measuring ESG. Partners’ views stand alone: they are separate from each other, the FT and the FT Moral Money Forum.
Do Standards for Sustainability Reporting need to be mandated?
Robert G Eccles, HMI Advisor, Saïd Business School, University of Oxford
Let’s be clear about mandated standards for financial and sustainability reporting, especially what they are and what they are not.
Standards are a social construct. They are a consensus about how to represent a company’s performance. They are a baseline for analysis and dialogue that can be supplemented in many ways.
They are not, however, a perfect scientific solution that stifles debate.
Reporting standards are imperfect and must be viewed as a basis for contention and evolution. As such they are frustrating but essential. They level the playing field for both companies and investors.
One argument against sustainability reporting standards is that they do not capture the uniqueness of a company. The same is said about accounting standards. There is some truth in this assertion but the effect is exaggerated.
Standards are inevitably imperfect but they do enable comparability, which benefits both companies and investors. Reporting to a set of standards does not stop a company from providing additional information – and in fact most do.
The controversial “non-GAAP” earnings measures in accounting is one example. Another instance is how companies voluntarily disclose information in their quarterly calls and investor meetings that is not required, such as revenue and earnings by product line and market share.
So should the application of standards be voluntary or mandated? Here governments can be weak or strong in their approach.
In the former, a government endorses a set of standards but does not require companies to report against them.
This is similar to St Augustine’s plea: “O Lord, make me chaste – but not yet.” In such a situation, companies may choose to report in some other way or not report at all, and the benefit of comparability and having information from all listed companies, so essential to investors, is lost. Standards, therefore, are most effective if they are mandated.
Today the best hope for a global set of standards for sustainability reporting is the Sustainability Standards Board (SSB), which is being established by the IFRS Foundation under the direction of its private and public sector trustees.
To varying degrees governments around the world, including the US and those in the EU, have indicated support for the SSB. This is positive but far from sufficient.
If the EU eventually decides to mandate its own reporting standards through its Non-Financial Reporting Directive, the hope for global standards will be lost. If the US endorses standards set by the SSB but makes them voluntary – as is the case with US GAAP versus the International Financial Reporting Standards – then that is better than setting up its own standards.
Establishing a base set of global sustainability reporting standards that governments and institutional investors can mandate or require to be used would be an enormous step forward, albeit still an uncertain one.
This, though, is necessary if we are to shift capital allocation decisions so that they support a stable longterm economy and society, and a natural environment conducive to both.
For this to happen, performance targets have to be set, such as being net-zero by 2050 in greenhouse gas emissions. Standards have nothing to do with targetsetting. Without standards, however, there is no way to compare a company’s performance over time or its performance in relation to its peers.
* High Meadows Institute’ views are separate from other advisory partners, the FT and the FT Moral Money Forum
White & Case ESG team
Regulating ESG
The glut of reporting systems, frameworks and rating agencies causes confusion for both ESG watchers and participants and we need to achieve a greater alignment of expectation, disclosure and approach.
Is more legislation the answer? Regulation and better standards are on the way as a result of initiatives by both government and the private sector. Calls are increasing for mandatory disclosure.
Sector initiatives
Initiatives to try to standardise ESG reporting have emerged organically in several sectors. There is no doubt that peer participation encourages a race to the top but there is concern over equality of application, and achieving a level playing field will be crucial.
While voluntary initiatives encourage compliance, the risk is that companies could be benchmarked against peers whose operations are subtly different or that do not have the same level of disclosure.
Regulatory frameworks
In some industries existing regulatory frameworks have been extended to take in these organic initiatives. One example is financial services where institutions are increasingly expected to focus on ESG-related disclosures in their filings.
The pressure for this is becoming intense. In February Allison Herren Lee, the acting chair of the US Securities and Exchange Commission, directed the Division of Corporation Finance "to enhance its focus on climate-related disclosure in public company filings".
She also said it must update its climate change disclosure guidance, which dated back to 2010.
Lee later confirmed that the SEC had "begun to take critical steps toward a comprehensive ESG disclosure framework".
Regional regulation
Other regional initiatives include the EU regulation on sustainability-related disclosures in the financial services sector. This sets transparency requirements and directs companies to make a risk assessment as part of their investment analyses.
The bloc also has plans for enhanced disclosure in non-financial sectors, as well as mandatory due diligence to cover human rights, environmental issues and governance.
Many industries have cautioned against a standard that reduces flexibility. In this regard, legislation that adopts indicative measurements may help address the concerns, especially across sectors and with businesses of varying sizes.
A “one size fits all” approach tailored to any one region is unlikely to work given the global nature of business. Worldwide harmonisation may be an ideal but it is not an immediate solution.
Covid-19 has put ESG in the spotlight – where it is likely to stay. But the potential weaknesses in measurement and reporting, together with the possibility of exploitation and manipulation, highlight that it is not just individual companies’ ESG credentials that are under scrutiny. More work is needed on the self-regulation of the “ESG industry” itself.
The UK Competition and Markets Authority’s current investigation into alleged greenwashing by ESG rating agencies is an important step in trying to bring order and structure to the industry.
In our view it is inevitable that regulation of ESG standards will follow.
* White & Case’s views are separate from other advisory partners, the FT and the FT Moral Money Forum