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Assessing ESG impact – What are the main tools available? 18 January 2022 185

Variables linked to a firm's record in social responsibility, environmental stewardship, and corporate ethics are growing in importance. So is the usage of reliable ESG disclosure tools.  

Whether one talks about corporate social responsibility (CSR), environmental, social, and corporate governance (ESG); or sustainability, there has been a growing consensus in the financial world: a firm’s success is no longer solely tied to financial metrics. 

In recent years, the idea and practice of corporate responsibility has evolved into profitable business transformation. Sustainable investment assets, which includes environmental, social and governance (ESG) and impact investing, have grown 15 percent between 2018 and 2020, and 55 percent worldwide since 2016, totaling over USD35 trillion globally at the start of 2020. According to the Global Sustainable Investment Alliance, sustainable investment assets continue climbing globally, with the exception of Europe which appears to indicate a decline. Such a shift, the group says, can be attributed to the way sustainable investment is defined under EU legislation.

Behind those headline figures remains one of the biggest obstacles when it comes to ESG reporting: the lack of rating standardization. It is estimated that the number of ESG regulations and standards have nearly doubled between 2015 and 2021, many of which have differing interpretations of sustainability, social responsibility, or ethical corporate governance. Further complicating the situation is  the fact that there are currently over 600 ESG reporting provisions globally.

In light of this issue, the London Institute of Banking and Finance has recommended the usage of the following 10 ESG disclosure tools:

Sustainability Accounting Standards Board

SASB standards guide the disclosure of financial material sustainability information by companies to their investors. Available for 77 industries, the standards identify the subset of environmental, social, and governance (ESG) issues most relevant to financial performance in each industry.

Global Reporting Initiative

GRI (Global Reporting Initiative) is an independent, international organization that helps businesses and other organizations take responsibility for their impacts, by working with private enterprises, investors, policymakers, civil society, labor organizations and other experts to develop standards and promote their use by organizations around the world. Such standards advance the practice of sustainability reporting and enable organizations and their stakeholders to act and make better decisions that create economic, environmental, and social benefits for everyone.

Accounting for Sustainability

Accounting for Sustainability (A4S) was established by HRH The Prince of Wales in 2004. A4S aims to inspire action by finance leaders to drive a fundamental shift towards resilient business models and a sustainable economy. A4S combines technical expertise with broad reach within the finance sector. The organization can provide guidance and convene senior leadership to inspire action, transform decision making, and scale up.

The EU Sustainable Finance Disclosure Regulation

According to the directive’s official wording, the SFDR “lays down harmonized rules for financial market participants and financial advisors on transparency with regards to the integration of sustainability risks and the consideration of adverse sustainability impacts in their processes and the provision of sustainability‐related information with respect to financial products”. The regulation hence prevents “greenwashing” and enables comparisons for sustainable investment decisions in the European Union context. The SFDR primarily applies to financial institutions operating within the EU.

Carbon Disclosure Project

CDP is a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states, and regions to manage their environmental impacts. The world’s economy looks to CDP as the gold standard of environmental reporting with the richest and most comprehensive dataset on corporate and city action.  CDP supports thousands of companies, cities, states, and regions to measure and manage their risks and opportunities on climate change, water security, and deforestation.

Principles for Responsible Investment

The PRI is the one of the world’s leading proponents of responsible investment. It works to understand the investment implications of environmental, social and governance (ESG) factors, and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions. PRI encourages investors to use responsible investment to enhance returns and better manage risks, but does not operate for its own profit.

Climate Disclosure Standards Board

The Climate Disclosure Standards Board is an international consortium of business and environmental NGOs committed to advancing and aligning the global mainstream corporate reporting model to equate natural capital with financial capital. CDSB offers companies a framework for reporting environmental information with the same rigor as financial information. In turn this helps them to provide investors with decision-useful environmental information via the mainstream corporate report, enhancing the efficient allocation of capital.

Task Force on Climate-Related Financial Disclosure

The TCFD was established to develop recommendations for more effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions and, in turn, enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks. TCFD’s disclosure recommendations are structured around four thematic areas that represent core elements of how organizations operate: governance, strategy, risk management, and metrics and targets. These thematic areas are intended to interlink and inform each other.

The 2° Investing Initiative

The 2° Investing Initiative (2DII) is an independent, non-profit think tank working to align financial markets and regulations with the Paris Agreement goals. Globally focused with offices in Paris, New York, Berlin, London, and Brussels, 2DII coordinates some of the world’s largest research projects on sustainable finance. Its team of finance, climate, and risk experts develop research, tools, and policy insights to help financial institutions and regulators hasten and adapt to the low-carbon transition.

The Science Based Targets initiative

The SBTi is a partnership between CDP, the United Nations Global Compact, World Resources Institute (WRI) and the World-Wide Fund for Nature (WWF). This initiative mobilizes the private sector to take the lead on urgent climate action through science-based targets on how much and how quickly businesses need to reduce their GHG emissions to prevent the worst impacts of climate change - leading them on a clear path towards decarbonization.

In spite of the challenges posed by the lack of rating standardization, there are several reliable disclosure tools that could help businesses and financial industry players advance ESG-linked transformations. As indicators tied to social responsibility, environmental stewardship, and corporate ethics play an increasingly bigger role in a firm’s success, utilizing a reliable disclosure tool is bound to be equally as important.

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