Meeting investor calls for sounder sustainability reporting

By Yannick Ouaknine, Head of Sustainability Research, Societe Generale

Look at the numbers. Inflows into funds that invest in line with environmental, social and governance (ESG) principles hit a record US$347 billion globally last year, according to Bloomberg¹.  More than 700 ESG funds were launched. And ESG assets are on course to exceed US$53 trillion by 2025 – that would equate to more than a third of the expected US$140.5 trillion of assets under management at that time.

In Asia Pacific, 57% of investors say they will have “completely” or “to a large extent” considered ESG factors in their investment decision-making by the end of this year². 

As investor demand for ESG assets surges, the corollary is higher expectations for corporate reporting including disclosure on the ESG risks companies face and how they are addressing them. As concerns about “greenwashing” mount, it is critical firms go beyond advertising and marketing that shows off a firm’s sustainability credentials. 

From the CEO to the investor relations team, executives realise that more transparency about ESG factors is already influencing their cost of capital and will do so more in the years ahead. They understand that more robust sustainability reporting will give them an edge. 

Standardisation is required

The risk of greenwashing is exacerbated by the lack of an official definition about what constitutes a sustainable investment. Investors are pressuring regulators to identify and adopt a more standardised and systematic approach to responsible reporting. Country and regional regulations exist but move at different speeds. Europe is clearly in the lead and the US is playing catch-up under the Biden administration, but it is widely recognised that Asia has lagged behind – although we see momentum growing.

If regional reporting initiatives multiply, corporates will find it hard to report against universally accepted and, vitally, trusted metrics. That risks leaving investors without a clear picture of what good ESG performance looks like.

ESG rating agencies can play a role

ESG ratings are an important tool for investors looking for that clearer understanding, but there is a high degree of divergence in how different agencies assess the same companies. For that reason, some institutions have already developed an in-house approach to ESG analysis that allows them to generate their own views. For investors who do rely on external ESG ratings, though, it is key to find the agency most closely aligned with their convictions. Some investors are ethical, others philosophical and some simply want higher ESG-driven returns. Agencies, on the other hand can be theme-oriented, focusing solely on carbon emissions, for example. 

Mandatory and non-mandatory reporting

A lot of companies report to standards set by the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase reporting of climate-related financial information. Its success shows what can be done. But its standards aren’t compulsory or universally adopted.

Mandatory or not, sound reporting adds value beyond compliance. Asian companies seeking to enter European markets or to be included in portfolios managed by ESG-focused global investors will be expected to make extensive disclosures. And all companies in the region have a better chance of benefiting from the structural shift towards ESG investment with better reporting in place. 

Linking reporting and performance

The challenge is understanding the financial relevance of ESG metrics in terms of outperformance and risk management. Companies with stronger ESG performance are likely to perform better, retain talented people and create long-term value for investors, which is why tracking and effectively reporting the performance of ESG investments is vital. 

The positive correlation between adopting good ESG standards and financial performance is backed up by research that shows the top 10% of highest-rated ESG companies outperformed Europe’s STOXX 600 index by 36.8% since 2013³. Companies considering boosting their ESG credentials should have a lead in terms of better performing business plans. Those firms at an early stage of gathering relevant data should set ESG targets aligned to a certain time frame, closely monitor performance, and disclose their performance in a transparent way. 

Certainly, greater disclosure may involve increased cost for companies and the need to implement new processes. But the potential advantages in terms of securing capital from the rising tide of ESG-oriented investors mean that listed companies across Asia and beyond should be acting now to assess how they can enhance their ESG reporting.
 

---------------------------------

[1] https://www.bloomberg.com/news/articles/2021-02-10/the-490-billion-boom-in-esg-shows-no-signs-of-slowing-green-insight
[2] https://www.cnbc.com/2021/03/04/sustainable-esg-investments-surged-in-asia-pacific-in-2020-msci.html
[3] SG Cross-Asset Research/SRI, Sustainalytics, Thomson Reuters