The Path to Harmonization: What's Next for ESG Disclosure?

The Standards to which Ms. Guillot alluded, and which Mr. Fink supported, are tailored for 77 different industries and focus on “financial materiality”—those ESG issues that directly affect a company’s financial performance. That arms investors with the quantitative, industry specific, and financially material ESG data they crave—and which they are increasingly trying to weave into their investment decisions.

“Silos within investment management firms are breaking down, and governance and ESG teams are increasingly integrated with portfolio management and research teams,” Ms. Guillot pointed out. “Today, the people actually making buy and sell decisions on securities increasingly believe that ESG issues can impact value.”

Companies similarly benefit. SASB allows companies to communicate with all investors through a consistent set of ESG standards. “Often today, across the same industry, each company’s disclosures on the same ESG topic will be different. The companies that are great performers can’t get credit because their information can’t be compared to their peers. If SASB’s Standards can help companies report comparable, consistent and reliable ESG metrics, then companies can benchmark their performance and investors can allocate capital toward the best performers,” Ms. Guillot told me. “That starts a virtuous cycle.”

That was January of 2020. By the time we caught up again over the summer, COVID-19 had upended the corporate world. I wanted to know if it had done the same for ESG disclosure. “The first week we were in lockdown I asked myself: ‘Is what we’re doing irrelevant, or more relevant than ever?’” Ms. Guillot said. “We’ve seen it is, in fact, more relevant. I look at all those elements of human capital—health and safety, leave, pay for hourly workers—and how crucial it is for companies to manage their workforces through this. We heard from our investor advisory group—who manage more than $40 trillion—that ESG disclosure isn’t going anywhere.”

I pressed her on this. Amid all the uncertainty of a pandemic, have investors’ actions on ESG really aligned with their words? “There’s no doubt we’re at a stage where ESG implementation varies at investment firms, and you see that even across teams within the same firm. But I can tell you, investors are very, very focused on this. And for people in IR who aren’t hearing questions about ESG: You will be hearing them in the future. I have no doubt about that.”

If the pandemic reinforced the need—and investor appetite—for ESG disclosure, it hasn’t clarified how companies should actually measure and report on those ESG issues. There remain at least a dozen ESG frameworks and standards that both companies and investors struggle to understand, let alone implement. 

Ms. Guillot maintained that SASB’s Standards were straightforward for investors to digest and for resource-strapped companies to deliver: “The SASB Standards are explicitly defined not to be an enormously heavy lift,” she explained. “On average, each SASB Standard has six disclosure topics and 13 metrics. This is information you probably already have somewhere within your business—and if you don’t have quantitative information, you probably have qualitative information about how you’re managing the risk.”

Given the Standards are cost-effective for companies and in high demand with their investors, why aren’t more companies disclosing in line with it? “There’s still skepticism,” Ms. Guillot told me. “Do portfolio managers really care? Do sell-side research analysts care? There’s also a question around risk, particularly legal risk. The default position has often been: Don’t disclose information unless you have to. That’s shifting a bit; do you run a greater legal risk by disclosing or not disclosing?

“Also, this field isn’t as mature as traditional financial reporting. The metrics are newer. And because the metrics are newer, there are often concerns about the rigor, the controls over the information. How do companies get comfortable enough with their controls and governance over the information so they can put it into the public domain, especially in investor-focused communications?”

In the autumn of 2020, five major players in sustainability disclosure, including SASB, announced a shared vision for how existing standards and frameworks can complement Financial GAAP and serve as a basis for a comprehensive corporate reporting system. A few months later, Ms. Guillot and I caught up once more, on the eve of yet another huge announcement: In mid-2021, SASB will merge with the International Integrated Reporting Council (IIRC), a global coalition of regulators, investors, companies, standard setters, the accounting profession, academia and NGOs. The move will create a new organization, the Value Reporting Foundation, which Ms. Guillot will lead as CEO.

The Financial Times rightly called the merger “an important development for ESG investing.” That’s because the IIRC provides a reporting framework that establishes what ESG topics companies need to report on; SASB’s Standards mean that data will be reported consistently. “Bringing the two groups together should help make ESG investors’ lives a lot easier,” the FT concluded. By the of end 2021, SASB will operate within a new organization, but that won’t affect the use or popularity of its Standards.

Such collaboration hints at what is likely to be the key trend of 2021: consolidation of different ESG standards and frameworks. Ms. Guillot predicted that “further harmonization” for ESG reporting is likely only a year or two away.

Where does all this leave companies? Why should they try to understand and report on ESG when there remains so much uncertainty about the best way to do so? “Control your story, control your story, control your story,” Ms. Guillot said. “There’s an entire landscape of ESG raters and rankings. Large global investors hold almost every listed company in the world. If your company doesn’t disclose, someone—whether that’s a portfolio manager or index provider or sustainability rating provider—is still going to try to reach a conclusion about your company’s ESG performance. You’re in a much better position putting some information out there than nothing at all,” she advised. “Tell your story."

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Amelia Pan is a Partner in Brunswick’s London office focused on investor engagement, environmental, social, and governance (ESG) and shareholder activism. She is also the host of the firm’s “ESG Agenda” podcast.

Illustration: Nigel Buchanan