By Morgan Slebos, Director Sustainable Markets, PRI and Joss Tantram, Director, Redefining Value, WBCSD

Bringing investors and companies together

In light of the increasing recognition that business and investment must respond to the accelerating crises in climate, nature and equity, the need for better, more accessible information and communication on sustainability between business and investors is ever more pressing.

To respond to this challenge, the Principles for Responsible Investment (PRI) and the World Business Council for Sustainable Development (WBCSD) initiated a collaboration in 2020 to explore and drive corporate and investor action on sustainability.

Hosted by Fiona Reynolds, PRI CEO, and Peter Bakker, WBCSD President and CEO, we convened a diverse group of leading Chief Investment Officers (CIOs) from the investor community, and Chief Financial Officers (CFOs) from the issuer community, to participate in a series of roundtables. Participants represent a broad range of corporate sectors, investment asset classes and geographies, allowing us to capture a variety of functional, regional and industry perspectives to explore what constitutes decision-useful sustainability information, how it is used, and how corporate-investor communications on sustainability can be improved.

Investors and corporates still have a lot to learn from each other such as understanding priorities and processes and can act to identify challenges which need to be overcome.

The road to global sustainability reporting standards

Global approaches to the standardisation of sustainability reporting are moving fast, and the round tables have received inputs and updates on the European Union’s Corporate Sustainability Reporting Directive (CSRD) and from the International Financial Reporting Standards (IFRS) Foundation.

With The IFRS Foundation’s recent announcement that it is establishing an International Sustainability Standards Board (ISSB), we have high hopes that the institutional arrangements and technical groundwork for a global sustainability disclosure standard-setter will lead to a reporting landscape that meets the needs of both investors and corporates.

However, despite these developments, significant challenges remain to putting sustainability at the heart of corporate-investor engagement and decisions.

Getting the right data: the investor perspective

Corporate sustainability reporting is a key component of investor decision-making. Many investors consider Environmental, Social & Governance (ESG) risks facing companies, focusing significantly on key outcomes-related considerations such as diversity, and companies’ alignment with policy objectives such as ‘net-zero by 2050’, often at multiple stages of the investment process. This is shaped by client demand for sustainable investment products. There is growing awareness of ESG-related risks and the impact of investment decisions on real-world sustainability outcomes, as well as the proliferation of sustainability disclosure requirements for investors.

However, investors face several challenges in securing the ESG data they need. The required data is not always available, easily accessible, reliable or comparable across companies, particularly when it comes to sustainability-related targets and operating plans to achieve these. For active investors, established engagement channels with portfolio companies can help to overcome these gaps, but not all companies can be engaged due to resource constraints. Meanwhile, smaller and passive investors tend to rely on third-party ESG data and ratings, which do not always capture company-specific nuances in reporting.

Providing the right data: the corporate perspective

There is a proliferation of engagement requests from investors. Different investors, as well as indices, ratings, and rankings, have varied requests for information which cannot always be satisfied. For corporates, there is also a sense that at times these can feel like box-ticking exercises, rather than something that will lead to substantive change. Even well-resourced multinational companies struggle to meet all the requests of investors and other stakeholders for disclosure.

By establishing a global baseline for sustainability-related financial disclosures, we hope that there will be clarity regarding the key sustainability information required by investors. This should then allow corporates to focus more on the substance underpinning disclosure than a push for disclosure as an end in and of itself.

How can investors overcome the gaps?

Investor data needs are constantly changing with evolving methodologies, standards and disclosure regulations. These needs should be communicated to companies in an iterative and forward-looking manner, so that companies can adapt their reporting accordingly. At the same time, investors should engage with policy makers and standard setters to ensure that corporate sustainability reporting requirements respond to their existing data needs.

Companies often collect large amounts of sustainability data but often do not meet investor needs. Investors can improve access to this information by communicating their precise data needs to individual companies and clarifying how this data supports investment decision-making.

Where possible, reporting should be complemented by direct engagement with companies. This allows investors to better locate relevant data, understand linkages between different sources, and improve their visibility of future performance objectives and the operating plans developed to achieve them.

What can companies do to overcome gaps?

Companies are increasingly focusing and prioritising their responses to investor requests, whilst simultaneously gaining a better understanding of what investors will be doing with the information. The inability to satisfy all investor requests also shows the importance of corporates developing and owning the narrative around their ESG approaches and information.

By consistently showcasing what a business believes is the most material information, it can provide better insights to investors to help them make informed decisions. Companies must recognise the inherent limitations of KPIs to convey the full picture of their value creation. Communication from companies on their future ambitions is crucial to allow for an assessment both of current performance but also of potential future prospects.

Similarly, clear and credible transition plans, underpinned by consistent, comparable, and timely disclosure to track progress over time are required to provide investors with the insights they need to make informed decisions.

Companies should ensure their ESG information is easily accessible, including consistent integration within existing Investor Relations (IR) communications, as well as through the use of search functions, ESG data sheets, and mapping against key indices/frameworks to help investors find the information they seek.

Calling on regulators and standard setters to address fragmentation

The work of the IFRS International Sustainability Standards Board (ISSB) could be invaluable for both corporates and investors. When jurisdictions adopt ISSB standards at speed, corporates will benefit from universally acknowledged guidelines and definitions for required corporate sustainability disclosures. It will also allow investors to gain access to higher quality and more comparable ESG data.

To meet evolving investor data needs, the ISSB should strongly consider developing its work program to include standard-setting across a broad range of ESG issues beyond climate, and to cover the wider sustainability outcomes of corporates.

At the policy level, individual jurisdictions must collaborate to build a truly global baseline that allows for reporting according to the standards in one region to be suitable for use within others. To achieve this, policies and standards should build on existing reporting practices. This would not only minimise the adjustment burden for companies and investors, but also maximize comparability across jurisdictions and reporting periods.

What’s next for the WBSCD-PRI collaboration?

The WBCSD-PRI collaboration will continue in the coming year, focusing on the systemic changes needed for sustainability to be at the heart of investor and company disclosure and assessment, including through the development and adoption of global ESG standards. We will ensure that the voice of progressive investors and representatives from the real economy is represented in the discussions which will be undertaken by policy makers, standards setters and the producers and users of sustainability information.

Together, we want to ensure that capital markets have access to relevant information that helps them recognise and reward the most sustainable businesses.

In the meantime, WBCSD is intensifying work on:

  • Exploring how our Vision 2050 ambition for “9+ billion people to be able to live well, within planetary boundaries, by mid-century” translates into transition imperatives and pathways for corporate action.
  • Driving the definition of Future Proof Business, to advance the mutual recognition of good practice and performance, by both companies and capital market actors.
  • Accounting for True Value to measure and report social and environmental performance with the rigor and standardization of financial performance information.
  • Contributing to the evolution of impact assessment and management.

The PRI, in turn, will work further on overcoming challenges mentioned above through:

  • Continuing to engage in regional and global standard-setting processes on behalf of our signatories to ensure that investor data needs are understood and considered.
  • Acting as a partner on the newly launched Impact Management Platform.
  • Encouraging the clarification of ESG ratings use in both active and passive investment strategies.
  • Raising awareness among our investor signatories on these developments. This will be done through extensive communication with our investor advisory groups.

Join us for our virtual event PRI Digital Forum – Driving Meaningful Data kicking off on 24 November which will focus on the global standard on corporate sustainability disclosure, emerging investor data needs and regional policy developments.

 

 

 

This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories.Please note that although you can expect to find some posts here that broadly accord with the PRI’s official views, the blog authors write in their individual capacity and there is no “house view”. Nor do the views and opinions expressed on this blog constitute financial or other professional advice.If you have any questions, please contact us at blog@unpri.org.