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June 15, 2022updated 21 Jun 2022 11:19am

Calls rise for ESG sector data, while carbon price hopes fade

Efforts to standardise sustainability disclosure are gaining momentum, but investors say more sector-specific information would be useful for both climate reporting and carbon pricing. And some dismiss the likelihood of a global agreement on the latter.

By Vibeka Mair

Richard Manley of CPP Investments sees companies falling short of what the pension fund manager expects in terms of sustainability reporting. (Photo courtesy of Emily Mudie, ASV Photography)

  • National and multi-jurisdictional efforts to standardise corporate ESG reporting are proliferating and gaining momentum, with China now throwing its hat in the ring.
  • But some investors are impatient at the slow pace of progress, with Canada Pension Plan Investments calling for sector-specific ESG data disclosure at a Capital Monitor event last week.
  • There were also calls for carbon pricing to be sector- and geography-specific amid doubts that a carbon tax will be achievable.

National regulators and international standard-setters are working to harmonise best practice across jurisdictions for corporate ESG disclosure to facilitate the measurement of risks such as climate change.

But while the holy grail in reporting – and indeed carbon pricing – is to have globally accepted metrics, executives at the Future of Climate Finance conference, hosted last week by Capital Monitor and New Statesman, argued that more sector-specific data was needed for both climate reporting and carbon pricing. These comments came as some industry experts at the event dismissed a globally agreed carbon price as unachievable.

ESG disclosure initiatives are proliferating in the world’s leading economies. For example, Beijing-based state-backed body the China Enterprise Reform and Development Society has, with the help of Ping An Insurance, developed the country’s first guidelines on ESG disclosure for companies, which became effective on 1 June.

And the US Securities and Exchange Commission (SEC) in March put forward draft rules that would require public companies to disclose extensive climate-related information in their SEC filings.

Meanwhile, in April the European Financial Reporting Advisory Group (Efrag) started a consultation on the draft European Sustainability Reporting Standards (ESRS) that will help inform the EU’s Corporate Sustainability Reporting Directive (CSRD), with a deadline of 8 August for comment. The UK, since its exit from Europe, is planning to bring forward Sustainability Disclosure Requirements for corporates and financial institutions.  

Cross-border initiatives are also progressing, with the International Sustainability Standards Board (ISSB) consulting on the disclosure of sustainability-related financial information and climate-related disclosures, with a deadline of 29 July.

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Yet there are concerns that these separate standards will lead to fragmentation and confusion, something that ISSB vice-chair Sue Lloyd acknowledges. Speaking at the Future of Climate Finance event on 8 June, she said: “Nobody wants to see convergence between the ISSB and Efrag more than me.”

The ISSB is working “really hard” with bodies including Efrag, the European Commission and the SEC to achieve greater harmonisation between their standards and approaches to disclosure. To this end, the ISSB has set up a jurisdictional working group incorporating regulatory representatives from China, the EU, Japan, the UK and US.

Corporates pushed to step up on ESG disclosure

But while investors are keen to see a single accepted disclosure standard, some feel that corporates themselves should do more to improve the availability of sustainability data and accelerate the inclusion of such disclosure within traditional financial reporting.

Speaking at the event, Richard Manley – head of sustainable investing at Canada Pension Plan (CPP) Investments and chair of the Sustainability Accounting Standards Board (SASB) Investor Advisory Group – said the C$539bn ($417bn) Canadian public pension fund manager expects companies to disclose all material risks and opportunities, and that the business world today should have a more expansive vision of what that entails.

“We’re 20 years into this journey [in sustainability disclosure] and we still don’t have a single metric that is comprehensively reported on the same basis by independent issuers for any sector,” he said.

“To frame it in valuation terminology, it’s like saying I want to use Ebitda [earnings before interest, taxes, depreciation and amortisation] to value companies, but only 40% of them report Ebitda and those that do report it have different definitions and none of them have that signed off by an auditor. We have to advance beyond that state today.”

With sustainability standards, Manley added, there is an opportunity to deliver a framework that is sector-based and decision-useful, is comprehensively reported, can be assured, and can be used across public and private markets.

This is in keeping with a CPP Investments report published in October last year entitled ‘The Future of Climate Change Transition Reporting‘. It argues for a move from a top-down scientific view of what needs to be done across sectors to address climate change to a bottom-up approach, with businesses starting locally by decarbonising their operations “process by process”. The report suggests ways to approach carbon abatement in highly polluting sectors.

Some industries have recognised the benefits of a more focused approach on ESG disclosure. The UK housebuilding sector, for instance, launched the Sustainability Reporting Standard in late 2020. Housing associations report on a range of relevant ESG metrics under this framework, including climate, to help investors compare and contrast companies in the sector, said Simon Hatchman, executive director of resources at PA Housing, also speaking at the Future of Climate Finance event. “We recognise the value in reporting in a consistent way across the sector.”

Frameworks such as the Taskforce on Climate-related Financial Disclosures (TCFD) also have separate guidance for carbon-intensive sectors. Global ESG Benchmark for Real Assets is a well-trusted reporting standard.

SASB standards, focused on financially material sustainability information, are available for 77 industries across 11 sectors (see chart below). The SASB standards are housed within the Value Reporting Foundation, which this month merged into the IFRS Foundation, the organisation that established the ISSB.

Global carbon price "not going to happen"

Another area where sector-focused data would be useful is in carbon pricing, said Michael Hugman, director of climate finance at the Children’s Investment Fund Foundation, a London-based independent philanthropic organisation.

Speaking at the conference, he called for the business and investor community to lobby for sector-specific, geographically focused carbon pricing, saying regular calls for a global carbon price were “political nonsense”.

“There is a danger with this idea that lots of business and investors love to send letters every year calling for a carbon price,” Hugman added. “It’s not going to happen. It’s the policy lobbying equivalent of 2050 net zero.”

Last year’s UN Cop26 conference on climate change saw asset owners redouble their calls for a carbon price. The IMF, OECD and World Bank are also long-standing advocates of the idea.

But Anastasia Guha, global head of sustainable investment at consultancy Redington, backed Hugman’s view. Five years ago a carbon tax was held up as a credible goal, she said on the same panel, “but then reality kicked in and… [it] became more evident to me that this is just not going to happen.”

In the absence of a globally agreed carbon price, a more feasible aim – and one that would enable price discovery – would be to have large-scale emissions trading regimes in major economies like the US, Europe and China employing carbon border-adjustment mechanisms, Guha suggested.

ESG disclosure and a global carbon price have been under discussion for decades; it may make sense to accept political realities and change tack if concrete progress is to be made.

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