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By: Lisa Dorian, Corporate Finance Institute & Derek Young, Summit Strategy Group
Rise of ESG Disclosure
Environmental, Social and Governance (ESG) disclosure originates from sustainability reporting that began in the 1980s. U.S. chemical and oil & gas companies began reporting on their environmental impact at that time in response to increased scrutiny of their industries. The pressure to produce these reports was linked to evolving concepts of sustainability and changing views of corporate environmental and social responsibility.
While the roots of Corporate Social Responsibility (CSR) are grounded in the environmental and civil rights movements of 1960s-70s, the term Sustainable Development emerged from the 1987 United Nations report, “Our Common Future,” also known as the Brundtland Report. The Brundtland definition of sustainable development framed several decades of corporate initiatives to increase output while minimizing and reporting on environmental impact.
As sustainability and CSR reporting grew, concerns rose around greenwashing, or deceptive marketing practices to persuade consumers that an organization’s products and policies are environmentally friendly. This paved the way for the Global Reporting Initiative (GRI), which provided credible third-party guidance and an auditing framework to help readers objectively evaluate corporate sustainability reports.
Growing demands from regulators and the financial community for greater transparency and more specific performance metrics beyond environmental impact ushered in today’s ESG frameworks. The need for sustainability accounting has also given rise to frameworks such as the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD), and the Carbon Disclosure Project (CDP). These frameworks have been widely embraced and guide ESG reporting and disclosures across industries. According to the Government Accountability Institute, in 2019, 90% of the S&P 500 published a sustainability report. Further, the TCFD had more than 1,000 supporters in 2020, and nearly 600 companies published SASB disclosures in 2021.
Changing Investor and Regulatory Expectations
Over the past 3 years, investor expectations regarding ESG have evolved dramatically. In 2020, Blackrock, the world’s largest institutional investor, published a report titled, “Toward A Common Language for Sustainable Investing,” stipulating that companies they invest in are expected to use SASB and TCFD for annual ESG reporting. Investors are demanding consistent, comparable, and reliable ESG disclosure of material information by corporate issuers. At the same time, regulators such as the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of the Treasury are working towards mandatory ESG disclosure requirements, particularly in climate impact and climate risk.
In the last decade, many sustainability disclosure laws have been enacted globally, including India’s mandatory CSR Policy, the EU’s Non-Financial Reporting Directive, and the Canadian Securities Administration (CSA)’s Environmental Reporting Guidance. As this trend continues to gain momentum, there is little doubt that mandatory reporting is forthcoming with an increased demand for corporate disclosure. Already, the UK has mandated climate reporting and The U.S. House of Representatives, in June 2021, passed the first bill that would impose new ESG due diligence and disclosure requirements for public companies.
The Need for More Consistent ESG Disclosure Frameworks
While the growing demand for ESG reporting has led to a significant increase in corporate disclosure, several reporting and disclosure issues remain to be resolved. First, while there has been a significant increase in ESG performance data being published, much of it is not consistent. According to the Rate the Raters Report, by SustainAbililty/ERM , there are more than 600 different ESG rating and ranking platforms currently evaluating public companies – with each bringing their own unique set of priorities and rating criteria. This has had the unintended consequence of generating reams of data without providing the clarity that stakeholders require.
Second, in the absence of more consistent reporting frameworks, more rigorous ESG data quality and accuracy assurance standards are required. It is essential that ESG performance data is accurate and based on consistent standards to ensure the information and related decision making are rooted in fact. Also, standardization will result in more reliable metrics, which help with evaluating performance against peers. More comparable data will help stakeholders reduce their labor hours, save resources, and eliminate the need for extensive normalization and correction.
The rise in the volume of reports and the absence of consistency in the reporting process have presented real challenges for financial analysts who must evaluate this data to make careful decisions about investment risk and opportunity.
The Role of Financial Analysts in Assessing ESG Disclosures
Financial Analysts need to be able understand and use ESG data when making financial assessments (risk and valuations). Analysts are in a challenging position as they process a significant amount of ESG performance data to evaluate investment risk and company valuations. ESG data can vary considerably between companies due to the inconsistency of reporting frameworks and the inclusion of quantitative and qualitative information. Analysts must have access to the guidance and training required to evaluate the information they are being provided to make complete decisions.
Financial analysts must be able to navigate myriad ESG rating and ranking platforms. It is imperative that analysts are familiar with the ESG reporting frameworks and their methodologies to evaluate data provided and recognize the difference between performance-driven reporting and marketing. Analysts must also be able to evaluate the context surrounding a company’s ESG information to make sound judgments. The analyst should bear in mind the material ESG topics and trends associated with specific industries & sectors, market size, location, management’s outlook, and local, political, and social dynamics.
Finally, analysts must stay current on the shifting and changing ESG landscape. Analysts are one of the most important audiences for ESG reporting. As such, more effort must be made to ensure that investment companies prepare and equip their workforce by providing essential training and setting high standards for evaluating and using ESG data.
Optimizing ESG Education for Financial Analysts
With increased attention on ESG performance, and a rising demand for financial analysts that are skilled in carefully evaluating corporate ESG data, high-quality continuing education is essential for the financial community.
There is a tremendous opportunity for firms to close the knowledge gap and drive improved ESG integration into capital allocation decisions. To capitalize on this opportunity, ESG training needs to be accessible, global and truly comprehensive. Analysts and firms should opt for programs that focus on all three aspects of ESG and navigate the intersectionality between all three factors.
More ESG education for the financial community is needed. There is currently no specific degree in ESG, and while there are environmental science and sustainability degree programs, they can be expensive, time-consuming, and may not focus on social and governance as intensely as required.
CFI’s ESG specialist certificate can help in ESG education of the financial community. CFI’s ESG curriculum provides analysts with the foundational data and insight needed to help them be better prepared for reviewing ESG disclosures. CFI’s approach delivers a series of comprehensive courses that collectively form an ESG curriculum that provides a functional understanding of ESG and how to use ESG data when making sustainable investment decisions.
INFORMATION ON CFI and SUMMIT and HOW TO ENROLL IN THE CFI ESG COURSES.
Corporate Finance Institute® (CFI™) is a financial analyst certification organization that provides online training and education for finance and investment professionals, including financial modeling, valuation, and other corporate finance and banking topics. Since 2016, CFI’s programs and certifications have been delivered to over one million individuals at top universities, investment banks, commercial banks, accounting firms, and operating companies worldwide.
Summit Strategy Group is a California-based consulting firm specializing in ESG, sustainability and corporate reputation. Summit’s founding principle is that every client deserves a custom-built team of the best talent: Agile thinkers ready to help our clients navigate and succeed in today’s constantly evolving landscape.
How to Enroll: Interested participants can sign up for the ESG specialization bundle online through this link. The courses are 100% online and self-paced to provide the participants total flexibility. The Introduction to ESG course is free, while the other ESG courses form part of an overall ESG specialization bundle. Depending on your enrollment type, you will have two-year, yearly, or monthly access to your courses.
About the authors:
Lisa Dorian is Co-Founder, Chief Risk Officer and Managing Director of CFI.
As a finance executive, she gained extensive experience in governance, risk and compliance, as well as business process and strategy. She took that knowledge and experience and moved into education, where she has designed, developed and delivered related training programs for some of the largest global financial services firms, multinational corporations and professional associations.
Derek Young is a Managing Director and leads the ESG Consulting Services Practice for Summit Strategy Group. Summit is a California-based consulting firm that specializes in sustainability, ESG, corporate reputation and public affairs. Summit has been a partner to the Western States Petroluem Association since 2017.
Derek is a veteran ESG, sustainability, and CSR professional with more than 20 years of experience. He is a recognized thought leader in the areas of ESG, corporate citizenship, corporate responsibility and sustainability and has worked across numerous industries, analyzing and determining needs and opportunities for value creation and building and delivering strategic programs, and community and stakeholder engagement efforts.