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Meeting the need for a stronger sustainability framework

By: David Harris, Group Head of Sustainable Business

In recent years, the views of investors in the area of Environmental, Social and Governance (ESG) have matured significantly. ESG-related information has moved from a "periphera" to a "core" part of investment analysis across all asset classes. Signatories to the United Nations-supported Principles for Responsible Investment (PRI) now represent $60 trillion in assets under management, up significantly from $22 trillion in 2010.[1] And almost all leading institutional investors in the UK and Italy are PRI signatories. Recent research from the Global Sustainable Investment Alliance (GSIA) suggests that sustainable investing strategies now represent nearly 60% of professionally managed assets for EU investors.[2]

The need for issuers to respond to the growing demand for ESG-related information is clear. In this context an issuer is any entity – corporate, financial institution, sovereign or fund – that lists equity or debt securities on a public, regulated market. By providing the information that investors increasingly want, issuers give a higher level of reassurance that they are effectively managing business risks and identifying opportunities. There is growing evidence that issuers who provide high quality information on the longer-term implications of ESG for their business are more likely to attract and retain long-term investors.[3] This can help these issuers reduce their cost of capital and increase their ability to raise new capital to finance sustainable projects.

Industry leaders have weighed in to express their support for a greater focus on and discipline for ESG reporting standards. Providing support for London Stock Exchange Group ESG reporting guidance, Mark Zinkula, CEO, Legal & General Investment Management remarked that, “ESG reporting is not just for larger companies. This is about all issuers, regardless of size, reporting relevant and material information to investors so that they can make better informed investment decisions.” 

In a similar vein, Maurizio Agazzi, DG, Fondo Pensione Cometa views the inclusion of ESG data in the investment process as a responsibility, commenting that, “We have a fiduciary duty towards our members, and we are committed to protecting retirement savings from any potential investment risk within a long-term horizon. The best way to do this is to take not only financial and economic factors but also ESG performance into consideration.” 

The process of reflecting on, analyzing and reporting ESG issues offers important insights into the positive and negative implications for financial and operational performance. This also applies to decisions about strategy and capital expenditure. Moreover, having a clear view on ESG issues and strategy places businesses at the forefront of opportunities presented by the unfolding sustainable and low carbon economy. Yet consistency in ESG reporting remains a challenge, as it can be difficult to apply lasting and widely accepted standards to such a rapidly evolving endeavor.

To respond to the growing interest and need for a common framework, London Stock Exchange Group has issued guidance, through its Global Sustainable Investment Centre, setting out recommendations for good practice in ESG reporting. The global guide is designed to help companies gain a clear understanding of what ESG information they should provide and how they should provide it by considering eight key questions: 


Strategic relevance: What is the relevance of ESG issues to business strategy and business models?

Materiality: What do investors mean by materiality?

Investment grade data: What are the essential characteristics of ESG data?

Global frameworks: What are the most important ESG reporting standards?
       

Reporting formats: How should ESG data be reported?

Regulation and investor communication: How can companies navigate regulations and communicate effectively?

Green Revenue reporting: How can issuers get recognition for green products and services?

Debt finance: What should debt issuers report and what are the emerging standards here?

 

Investors want to understand how well companies are managing the risks associated with ESG issues, seeing this as a key test of management quality, and to effectively compare progress in this area from issuer to issuer. They are also interested in the opportunities presented by the low carbon economy – and increasingly, they are allocating capital to companies that are well equipped to benefit from this.

To learn more about ESG reporting, further information on FTSE Russell’s sustainability framework can be found online at FTSE Russell ESG Spotlight or LSEG’s Global Sustainable Investment Centre.

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 [1] UNPRI Annual Report 2016. Available at http://annualreport.unpri.org/messages.html

[2] Global Sustainable Investment Alliance 2014 Study

[3] The 2012 ‘Short-termism, Investor Clientele, and Firm Risk. Harvard Business School Accounting & Management Unit Working Paper No. 12-072’ http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1999484. Paper by Brochet, F., Loumioti, M. and Serafeim, G.

 

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