Environmental, social, and governance (ESG) issues play a large role in the stability of markets and economies. These factors consist of far-reaching, broad issues such as poverty, pollution, climate change, and other factors that can influence long-term investments.They are important factors when considering the sustainability of an investment project. As ESG issues begin to occupy more of the global finance dialogue, the demand for companies to make disclosures of ESG metrics increases. Transparency with regards to these metrics allows investors to make more informed choices regarding long-term investments.
The WFE Guidelines
Last October 2015, the World Federation of Exchanges (WFE) issued new reporting guidelines for ESG metrics. As one of the world’s largest trade associations, WFE’s reporting guidance has the potential to become a major influencing factor in the way that exchanges and listed companies handle their reporting processes. As the global discussion on ESG continues, it is worthwhile to examine how the new reporting guidelines are implemented.
Selected ESG Investing Metrics from the Survey
The WFE composed the ESG Recommendation Guidance and Metrics survey by drawing from existing ESG regulations of member exchanges, as well as various reporting frameworks such as the Global Reporting Initiative. The survey consists of 34 indicators that exchanges and member companies can use to evaluate ESG factors. A few of these metrics include:
Environmental:
- Direct & Indirect GhG Emissions
- Carbon Intensity
- Primary Energy Source
- Water Management
Social:
- CEO Pay Ratio
- Non-Discrimination
- Board Diversity
Governance:
- Board- Separation of Powers
- Fair Labor Practices
- Bribery/Anti-Corruption Code (BAC)
- Tax Transparency
The 34 metrics are not a comprehensive list—exchanges and companies are encouraged to analyze more metrics as they see fit. The guidelines are intended to provide global uniformity with local customization options.
Voluntariness of the Survey
The ESG reporting survey is not mandatory; the 64 WFE member exchanges can choose whether or not to make the reporting directives mandatory or voluntary guidelines for listed companies. In a recent survey for WFE members, 32 of 52 member exchanges said their listed companies were required to disclose ESG information.
In a previous report, the WFE emphasized the advantageous role and position that exchanges have in terms of being able to effectuate widespread ESG change. There are more than 45,000 companies listed on WFE exchanges; thus, WFE reporting guidelines have the potential to create massive changes and promote uniformity in the way ESG reporting is conducted around the globe.
Continued Non-Responsiveness to ESG Reporting Implementation
Despite the recent upswing in ESG discussions and reporting, some public companies remain somewhat resistant to implementing reporting processes. Some common reasons why public companies don’t report on ESG matters include:
- Investors often don’t ask about financial benchmarks that revolve around ESG issues
- Some companies may consider such disclosures to be a waste of time and resources
- There are generally no clear standards for publishing ESG indicators
- ESG surveys aren’t necessarily representative of investor demand
Lastly, despite an abundance of research data, some companies argue that the ability to analyze energy and climate issues beyond 5-10 years into the future is difficult in the first place.
Benefits of Reporting
While some companies may be resistant toward reporting due to the perceptions listed above, it is clear that there are many benefits to establishing and implementing consistent, efficient reporting guidelines. The WFE’s Recommendation Guidance and Metrics document contains a long list of the positives of increased ESG disclosure. Some of these include:
- Promotes financial value by identifying opportunities for saving on costs, generating revenue, and mitigating risk
- Leads to a deeper understanding of stakeholder needs
- Promotes company-wide alignment on ESG goals
- Establishes measurement/reporting processes for handling ESG data
- Enhances company’s ability to attract and retain long-term institutional investors
- Improves employee perception of the company and attract more long-term employees
- Helps companies navigate existing disclosure requirements
- Assists in the creation of more resilient markets that are subject to less volatile changes
Some experts suggest that less frequent reporting (such as twice a year rather than quarterly) can help companies begin establishing positive reporting habits while not exhausting too many resources.
Improved Reporting Over Time
It may still be too early to determine how the WFE’s Guidance document will be received by companies. However, one thing is certain—there is definitely room for improvement with ESG reporting, especially when it comes to establishing returns that are sustainable in the long-term. For instance, only 13% of Australia’s ASX200 Companies provide “meaningful information” regarding sustainability factors. As more reporting guides are created, these figures may improve, but progress may be slow. As mentioned, most member companies would agree that more consistent and uniform metrics would facilitate more regular reporting.
Continued disclosure of ESG factors is important for allowing investors to make properly informed choices. Awareness of these issues continues to be spread through guidelines such as those set forth by WSE, and through other means such as forums and conferences which facilitate communication on such matters. If you have any questions or concerns regarding ESG issues or other related matters, contact us today at Kessler Topaz for more information and updates on pertinent issues. Our team of attorneys is passionate about staying on the forefront of crucial sustainability issues.