Posted in GreenBiz
February 23, 2022

Whither ESG standards? Fewer abbreviations, bigger budgets and more clarity


Reprinted from GreenFin Weekly, a free newsletter. Subscribe here.

What happens when you gather the founder of CDP, the former CEO of the Global Reporting Initiative (GRI) and the head of investor relationships at the Value Reporting Foundation (VRF) in the Sonoran Desert? 

You craft my — and many other attendees’ — favorite breakout session at GreenBiz 22 last week, which was the largest GreenBiz event we’ve held. 

The standing-room-only panel, “ESG Standards: The State of Play,” sought to bring clarity to what companies should expect to see come out of the International Sustainability Standards Board (ISSB); where the industry is in the evolution and consolidation of leading sustainability standards setters; and how companies should think about and engage with the evolving ESG ratings schemes.

“The two words you often hear most associated with ESG are wild and west,” said GreenBiz co-founder and Chairman Joel Makower, kicking off what became a lively conversation infused with a dose of the healthy tension GreenBiz events are known to engender.

Investors don’t want the companies in their portfolios to be wasting time and resources.

As I covered in my chapter for the recently released State of Green Business 2022 report, the wild west of ESG is shrinking. This particular conversation at GreenBiz 22 was clearly one that could have run the entire length of the event’s three-day program, and it is a dialogue that will only grow richer as the year rolls on. 

So, just how is the world of ESG losing its wild ways and making space for a more measured and manageable paradigm?

What remains as the alphabet soup drains 

Investors globally are looking to make better informed decisions about sustainability-related risks and opportunities, and 2021 saw the ingredient-rich logo soup of ESG disclosure frameworks begin to drain. 

Tim Mohin, former head of GRI who leads sustainability at Persefoni, a climate disclosure and carbon management solution provider, conceded that yes, this is good news, but “there is still a collision course ahead.” 

Mohin went on to say: “What is getting cleaned up is one thing, which is financially material ESG standards. … The collision course now is that the Europeans are developing the Corporate Sustainability Reporting Directive (CSRD), which will have its own set of standards based on double materiality — what is financially material to the company and what the company is doing to impact people and the planet.”

Katie Schmitz Eulitt, among the earliest team members with the Sustainability Accounting Standards Board (SASB), preferred to frame it “not as a collision course, but as an opportunity for harmonization.” As director for investor relationships at the VRF, she hears one chief ask across her client base — simplification.

[Continue the dialogue about ESG and green finance with the invitation-only audience of sustainability, finance and investment leaders at GreenFin 22, taking place in New York City, June 28-29.]

“Investors don’t want the companies in their portfolios to be wasting time and resources,” Eulitt pointed out. “GRI is co-creating those standards that the EU is creating, and I think the ultimate opportunity for us here is that the European Financial Reporting Advisory Group (EFRAG) will look at the International Financial Reporting Standards (IFRS) disclosure standards as the half of double materiality relevant to enterprise value … then, at last, we will have the system that we’ve been talking about developing over the years, I think it’s possible.” 

But Mohin remained dubious: “There’s just no two ways around it. Unless there is one group developing a single set of standards for financially material ESG disclosure, you’re going to have two standards.”

2022 will hopefully deliver the final answer here, which I’m excited to dig further into, particularly from the investor lens, come June 28-29 at GreenFin 22. (You can request an invitation here.)

ESG standards — what for? 

Makower later turned the conversation to address a “heretical question” (a key ingredient for the healthy tension): Why do we even need ESG standards and ratings?

ESG investing is, in large part, built around risk. And risk is generally factored into traditional credit ratings from the most established ratings firms such as S&P, Moody’s and Fitch. So what is different about risk when it comes to environmental, social and governance issues, and what is missing from those traditional risk assessments that ESG captures? 

CDP founder Paul Dickinson offered a revelatory and refreshing answer. “How good do you think Moody’s is at predicting the geopolitical future of the planet? I actually think this is a political conference but politics with a very small P,” Dickinson said, referring to GreenBiz 22. “National security politics, global security politics, that’s what we’re all involved with, and Moody’s doesn’t look at that.” I don’t recall seeing any out-of-office messages for GreenBiz 22 stating, “I’m at a political conference,” but I absolutely agree with Dickinson in his framing of the convening. 

“If I was an ESG analyst 10 years ago, I’d be telling all the auto buyers to look at electric cars. But the ESG analyst in 2022 is not doing that because they’re already looking at electric cars. The job of ESG is to represent the next iteration of the relationship between investors, corporations and government.” 

Mohin answered Makower’s heretical inquiry with more of a “yes, and,” pointing to the need for much anticipated SEC regulations of “durable, reliable and robust” ESG disclosures and subsequent scoring. In the current paradigm, Mohin pointed out, “You get to pick which issues are important to report on. Well, guess what? A lot of companies don’t pick the ones that make them look bad.” So, ESG ratings are something investors and stakeholders do, in fact, need but only if they match the proper set of adjectives — consistent, comparable, credible.

The job of ESG is to represent the next iteration of the relationship between investors, corporations and government.

A key data point underscoring the need for reliability and robustness is that of the roughly 92 percent of firms listed in the S&P 500 that publish sustainability reports, “less than 40 percent of those have any audit or assurance, so companies get to choose their own adventure,” Mohin said. 

Investors won’t put up with the current paradigm of sustainability and ESG disclosures much longer, as they want and need data they can rely on. The remainder of 2022 should offer a sturdier foundation for the space via the anticipated emergence of an SEC requirement that companies provide fuller disclosures on climate. There’s also an expectation that the ISSB will accept its first standards by the end of 2022 along with growing pressure from the investor community for better and more consistent disclosure.

“First they ignore you, then they laugh at you, then they fight you, then you win,” Dickinson said in reference to the ongoing growth of ESG investing and sustainable finance. One could argue that we’re in stage three with stage four not too far out of sight — but what does this group of esteemed ESG veterans expect to see for the state of play in a year’s time? 

To boil it down across the three panelists:

  1. More big budget holders in the room, who are more animated about what’s already in motion;
  2. A more accountant-heavy audience, as well as more financial types to complement the sustainability leads; and 
  3. Fewer abbreviations and more clarity. 

For people, planet and ESG progress, may it be so.

[For more news on green finance and ESG issues, subscribe to our free GreenFin Weekly newsletter.]

February 23, 2022 at 03:33PM

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