By Joseph Vicari, managing director and ESG practice lead, Broadridge Financial Solutions
Imagine you’re back in high school. You arrive in class and there’s no teacher, no instruction, no textbook to offer information or guidance. You’re told you can voluntarily submit a report if you want, but there’s no assignment and no clear rubric.
At the end of the year, however, you get a grade. Unfortunately, you don’t know why your grade is what it is – it just is. And you’re not even sure how your grade compares to those of your classmates.
This is essentially the ESG ratings and disclosure environment that corporate issuers are having to operate in today.
‘Standards’ aren’t very standardized To be sure, standards and frameworks do exist. The problem is there’s too many of them and it’s starting to feel like alphabet soup: SASB, TCFD, GRI, Climate Disclosure Standards Board (CDSB), and so on.
Amid this confusion, corporations are being graded by third-party rating agencies like ISS, Morningstar/ Sustainalytics, MSCI, Glass Lewis, Moody’s, and so on. And the list grows every day: more than 800 entities now offer some type of ESG rating on a global basis.
Compounding these challenges, ratings across agencies don’t correlate especially well. For example, a good ISS rating could translate into a mediocre rating from Sustainalytics. Regulators are seeking true standardization Clearly, the status quo is untenable long term. It’s confusing for issuers as well as investors so it’s no surprise that regulators are hoping to provide some semblance of order.
On November 3, 2021 at the COP26 conference, IFRS announced the creation of the International Sustainability Standards Board (ISSB), its purpose to provide a comprehensive global baseline of sustainability-related disclosure standards.
This marked the first time a major international accounting governance body explicitly sought global disclosure standards around ESG. As part of this plan, the IFRS Foundation will consolidate the CDSB and the Value Reporting Foundation by June this year. These entities were created in early 2021 as part of a merger between the International Integrated Reporting Council and SASB.
Meanwhile, in the US, the SEC announced proposed rules in March 2022 that would require publicly traded companies to disclose certain climate-related risks in their registration statements and periodic reports. These proposed rules would explicitly incorporate standards from the TCFD.
In short, perhaps somewhat ironically, Europe appears to be heading toward SASB and the US appears to be heading toward TCFD.
What’s next? While we wait to see where the regulators finally come down, there are a number of things issuers can do to prepare. First, it’s important to gain familiarity with SASB and TCFD.
Though there is much alignment, SASB generally focuses on a corporation’s climate impact, while TCFD tends to focus on how environmental factors present long-term risk. Investors and stakeholders want to know how climate change will affect your corporation’s ability to deliver durable financial returns.
Second, it’s critical to hone your internal reporting, metrics and measures. It’s one thing to know what you need to measure, but it’s another thing to know how to measure. Try to find a partner with the right expertise to expand and refine your measurement processes and infrastructure.
Finally, prioritize your ESG storytelling. Although hard data indicators and metrics matter, ultimately your ability to attract capital will require meaningful engagement to proactively shape shareholder perceptions and expectations.
ESG messaging should showcase how you will navigate long-term risk and capitalize on new opportunities. In this respect, impactful ESG narratives go beyond mere facts and figures.
Whether you’re looking to improve your current ESG approach or simply getting started, Broadridge can help you build an insightful strategy to meet your goals. Our ESG consulting team offers a full spectrum of ESG capabilities, such as benchmarking relative to your peers, assessing your carbon emissions and evaluating where you are on your ESG journey. Learn more.
Broadridge, a global fintech leader with $5 bn in revenues, provides the critical infrastructure that powers investing, corporate governance and communications to enable better financial lives. We deliver technology-driven solutions that drive digital transformation for our clients and help them get ahead of today’s challenges to capitalize on what’s next.
Connect with us on LinkedIn
