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Mandatory ESG Reporting a Sign of a Maturing Market

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Running a business is about choosing between the “nice-to-haves” and what’s critical to the operation. But based on how some of the world’s largest investors are approaching opportunities today, there’s a priority on environmental, social, and governance (ESG) metrics.  

There has been a shift to mandatory sustainability reporting from voluntary sustainability reporting, said Doug Morrow, Director of ESG Strategy at BMO Capital Markets, to open the Age of Transparency: Investing Sustainability as ESG Reporting Becomes Mandatory panel at BMO’s Growth & ESG Conference. To understand the pivot, look no further than the shifting regulatory environment. In the past few years, the following changes have gained traction: 

  • The Green House Gas Accountability Bill (SB 253 and SB 261) in California requires many companies doing business in the state to disclose their Scope 1, 2, and 3 greenhouse gas emissions and climate-related financial risk information.  

  • The Corporate Sustainability Reporting Directive in the European Union, which launches next year, will require companies to report and audit how their operations impact the environment and society.  

  • The International Financial Reporting Standards (IFRS) S1 and S2 require companies to disclose all sustainability-related risks and opportunities.   

  • The formation of the International Sustainability Standards Board (ISSB), announced in 2021 at the U.N. Climate Change Conference (COP26), which develops and approves sustainability disclosure standards and provides a benchmark to inform economic and investment decisions.  

  • The U.S. Securities and Exchange Commission’s climate change rule is expected to be published early in 2024. 

“It’s important to think about what this shift means in the broader context of the heightened scrutiny that we have been seeing recently with ESG investing, especially in the United States, and where we sit in terms of the long-term evolution of ESG or sustainable investing,” said Morrow.

To better understand this evolution, Morrow turned to the panel that included Samantha Hill, MD, Head of Sustainability Integration, Global Leadership Team, CPP Investments; Michael Jantzi, ISSB Member, International Sustainability Standards Board; and Katherine Collins, Head of Sustainable Investing, Putnam Investment Management.  

Embedding ESG in the Investment Process 

Katherine Collins said ESG is a fundamental part of how the firm manages its roughly US$170 billion in assets under management, including about US$8 billion in assets overseen by its sustainable equity team. “Our focus on material environmental, social, and governance factors is increasingly integrated into our research process,” she said. “The goal is to have as complete a view of the companies we’re investing in as possible.” 

Getting that holistic view is critical to Putnam’s investment process because, rather than looking at ESG only through a compliance lens, the firm sees it as a potential alpha generator. “We are looking to identify companies where excellence in sustainability is adding to their fundamental strategy and potential for success over time,” she said.  

Putnam isn’t alone. CPP Investments also sees sustainability metrics as a material part of its investment process. Before pursuing an opportunity, CPP Investments, which manages US$170 billion in assets, examines how a company is approaching ESG from a financial perspective to determine the attractiveness of a potential investment, said CPP Investments’ Samantha Hill.  

The challenge has been trying to get consistent and reliable data. “The biggest challenge I see in terms of this maturation is around the fragmentation in the regulatory environment,” Hill noted. “ISSB has been phenomenal in trying to navigate that and try to focus it.” 

Shifting to Mandatory Sustainability Reporting 

Sustainability information enriches the investment process, said ISSB’s Michael Jantzi. “The shift from a voluntary environment to a mandatory environment is a significant change and we are seeing securities regulators around the world embracing it,” he explained. “It’s going to take time, and there will be jurisdictional initiatives that will have a unique aspect to each country, but we do have IOSCO’s (International Organization of Securities Commissions) endorsement for the ISSB standards.” 

While some countries will forge their own reporting path, the ISSB standards are widely accepted, Jantzi noted. “We’ve made remarkable progress now on starting to build what we call the global baseline of sustainability disclosures.”  

The shift means there is a growing expectation by stakeholders who want to see companies discuss material sustainability or climate-related risks and opportunities and connect them to their current or anticipated financial effects. As Jantzi explained, that’s new and it’s a reflection of the maturing market.  

Fiduciary Duty

Collins said she’s seen a shift in attitudes in her meetings with executives, with more focusing on ESG issues that are material to their operations and growth plans. Hill sees it in a similar way when she engages with companies about their sustainability plans. “We’re not telling you to spend time on something that’s not important,” she said. Executives should stay true to what matters to their business from a strategic, operational financial perspective and figure out how ESG fits into their business model and strategy. “Focus on those, and you’re never going to go wrong,” she said. 

As important as it is to push for transparency when collecting the metrics needed to make informed decisions around ESG, Morrow wanted to know if the one-time and recurring costs were getting any pushback from issuers. Hill said she doesn’t think that’s a major concern, adding that she believes the greater issue is more about whether companies are getting credit for what they believe to be the most relevant aspects of their business.

Despite having an alphabet soup of regulatory scrutiny around sustainable investing, the panel believed the market will reach a point where ESG is just an accepted part of doing business. “In the next 10 years we’re not going to be talking about sustainable finance or sustainable investing, we’ll just be talking about finance and investing because this will just be what you do as part of making sure that your clients or your plan members are put in the best position from a risk return perspective,” said Jantzi. “It’s just part of your fiduciary duty.”

Read more
Doug A. Morrow ESG Strategist

PART 2

Charting Your Sustainability Journey

John Uhren December 29, 2023

  Implementing a sustainability strategy is no longer a ‘nice to have’ for companies; investors and other key stakeholders expect…




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