Is there a need for globally mandated ESG reporting requirement?

As dangers associated with climate change continue to become more inescapable in the lives of companies and individuals alike, the importance and need for ESG – Environmental, Social and Governance – in the financial sector is growing stronger. Is it time for globally mandated ESG reporting in the financial sector?

recent survey conducted by software business Workiva found 70% of respondents believe organisations have a responsibility to demonstrate ESG performance to investors.

The survey also found transparency around ESG disclosures is becoming ever more integral to investor decisions, with companies undoubtedly due to face more pressure from investors on ESG progress.

This highlights not only a growing demand by investors for ESG reporting, but also a widening gap in the market for the introduction of a global ESG mandate.

According to Marye Cherry – head of ESG at Compliance Solutions Strategies – a global ESG mandate would go some way to tackling the current divergence that exists among nations when it comes to ESG.

She said, “I definitely believe that the financial industry will benefit from greater convergence among ESG-reporting regulations. In the very short time since the advent of the first comprehensive ESG regulations (SFDR), we’ve already seen a divergence in the EU, with, for example, the French ‘gold-plating.

“The UK has opted to go in another direction, pushing for mandated disclosures under the TCFD standard. It’s unclear where other regions will focus. At present, the US seems to be concerned primarily with greenwashing, while in Asia, some markets are focused on developing environmental taxonomies of their own. To prevent the ESG standards from becoming too fragmented, a global ESG mandate would indeed be desirable.”

Evidence needed on ESG reporting

While many companies and financial institutions have integrated ESG reporting into their framework, there are still some climate-related challenges the industry is failing to get to grips with. For example, a Greenpeace-led report recently found UK banks and assets managers were responsible for 805m tonnes of CO2 in 2019 – making it the ninth-largest carbon emitter worldwide.

Despite ESG reporting being a common feature amongst many banks in the UK, such findings indicate there is a growing importance on making sure the reporting is evidence-based – a point echoed by Castlepoint Systems CEO and founder Rachael Greaves.

She said, “There is evidence that mandating ESG reporting improves the quality of disclosures related to environmental, social, and corporate accountability measures. However, if the reporting is not evidence-based, the process may not result in material benefits, or in actionable outcomes.

 Audits and investigations into major corporations continually find that information management internally is poor, and that the real evidence to quantify or qualify metrics may be effectively ‘lost’ in the network: indiscoverable, of unprovable provenance, and often destroyed before its time.”

According to Greaves, one of the best and most measurable things organisations can do to not only improve the quality of their ESG reporting but also improve their ESG outcomes overall is to more effectively control and manage their own data.

To ensure ESG reporting is making a difference, a growing number of organisations are undertaking systemic change to solidify their stance on ESG.

For example, the People’s Bank of China recently revealed it will begin quarterly assessments of the green finance performance of 24 major Chinese banks starting 1 July this year.

Japan’s Financial Services Agency also recently issued recommendations on how to promote sustainable finance in the country. The regulator has an expert panel to explore how financial institutions can invest into Japanese firms that support the carbon-neutral transition.

Elsewhere, the European Banking Authority issued new guidance for financial institutions to bolster plans for ESG-related risks.

A key focus of the report included the resilience of institutions following financial impact of ESG risks in different time horizons. The report suggested that such assessments should have a comprehensive and forward-looking view, as well as early, proactive actions.

The debate will rage on amongst many regulators and institutions on how best to support financial organisations in fully integrating ESG reporting into their systems. There may be many who would like to see ESG reporting become a globally mandated requirement, however, there will also be a strong desire by many to ensure that this leads to real, concrete change in the industry.

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