Companies could be forced to disclose critical sustainability metrics under a new set of global environment, social and governance (ESG) metrics, according to a new report – Convergence Cometh, Know Thy Blind Spots from CRISIL Global Research & Risk Solutions.
The report expects there to be a convergence of a set of generally accepted principles for climate and other ESG reporting at the global level, in the next few years.
CRISIL identifies 45 KPIs likely to be included in the potential global framework of ESG reporting standards including the International Financial Reporting Standards (IFRS) which is likely to be rolled out in collaboration with standard-setting bodies and regional regulators.
It notes that the European Union (EU)’s Corporate Sustainability Reporting Directive (CSRD) will stand out as the “pole star” among ESG reporting standards, but might be largely confined to the EU.
“Even so, a global converged ESG reporting standard will not be a one-size-fits all. It may not completely integrate financial performance, ESG financial materiality, sector-specific factors and social impact materiality,” according to the report.
Breaking the KPIs down into global segments, CRISIL’s study finds that 78 % will pertain to the environmental and social pillars while 47% will be quantitative.
Around 10 KPIs will include indirect emissions, energy performance, pay inequality and employee safety while 15 will be on direct emissions, impact of climate on the business, waste and water management. Social KPIS will include supply chain practices, pay inequality and employee safety.
“The inclusion of these KPIs in a set of global disclosure rules will create a new and heightened level of transparency on corporate practices around many important environmental and social issues,” says Abhik Pal, Global Head of Research at CRISIL GR&RS.
“However, it’s important to note that even an eventual global standard may not fully integrate financial performance, ESG financial materiality, sector-specific factors and social impact materiality.”
The report also notes that while stock exchanges and regulators might gradually provide guidance on sector-specific metrics for corporates to report on, a full-fledged integration of sector KPIs into mandatory international standards is still a long way off.
However, it said the potential architecture of a globally converged ESG reporting standard will bring both benefits and challenges for financial market participants.
“Impending convergence will significantly influence integration and product innovation and financial Institutions will be able to plug missing data and add depth to sustainability assessments,” says Rahul Agarwal, Global Head of ESG at CRISIL GR&RS. “However, the lack of consistent sector-specific metrics and granular green data at a global level may create blind spots, driving demand for proxies and specialized data sets.”
Different factions of financial services will have their own challenges and opportunities. For banks, convergence will influence term sheets, and drive two-way climate risk stress testing and innovative social products.
However, they will need to address blind spots on sector expertise, external verification, ongoing monitoring and know-how of specialised datasets and models.
Asset managers, on the other hand, can leverage the impending convergence in ESG reporting standards to bolster their in-house research, enhance product-labelling standards and build more credibility with asset owners.
©Markets Media Europe 2021
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