There is a lack of standardized ESG reporting affecting firms of all backgrounds. Amid the adoption of several climate and sustainability regulations, corporate disclosures are constructed in many different ways. For firms in the capital markets, this disparity muddies the path to sound investment decisions and provides an inconsistent framework for their reporting. The need for uniform standardized quantitative ESG reporting with qualitative commentary has never been greater. How are investors interpreting and reporting corporate disclosures in relation to their net zero goals?
Proper KPIs and Sustainability Indicators Are Key
Investors must decide simultaneously on proper key performance indicators (KPIs) or key sustainability indicators, which means every investor has to follow different standards. These metrics are typically given by regulators or provided voluntarily, however, there are globally-accepted standards such as Task Force on Climate-Related Financial Disclosures (TCFD), Net Zero Asset Owner Commitments, and PRI CDP disclosure.
These globally-accepted standards ask for aggregated numbers and disclosure requirements on the pathway to net zero, aggregating upwards from the investments they are taking on. That means the disclosure on the entity and issuer levels are essential. Without these disclosures, the decision maker cannot follow the principles they implemented in their investment management agreements.
Concretely, the disclosure within the environmental pillar is focused on emissions and scope 1, 2, and 3 greenhouse gas emissions or the transition and physical risk. Based on the outcomes of these targets and metrics, these should define the road map to net zero.
Proactive or Reactionary Reporting
Anecdotally, most companies take a reactive approach to environmental, social, and governance (ESG) reporting. However, companies that are conscientious about their brand and reputation, or have a lot of visibility in the market, are being proactive to take a leadership position.
Companies that have taken the lead in proactive ESG reporting benefit significantly from that position. For example, companies getting out in front of the reporting mandates have uncovered various climate risks and a deeper understanding of the physical and transition risks businesses face. This allows them to start working through or mitigating those risks as the climate changes and policies unfold.
It can feel overwhelming to start collecting ESG-related metrics, and that's why many companies are reluctant to start. But it doesn’t need to be difficult.
For example, companies looking to start slow can identify one or two people in the organization – maybe from finance or risk – to start looking into the Greenhouse Gas (GHG) Protocol and the TCFD reporting framework. Starting with those two frameworks is a great way for firms to begin their sustainability journey and optimize their reporting.