Lack of standardisation biggest threat to ESG

According to new research, 45% of valuation professionals believe a lack of a standardised and recognised measurement system is the biggest threat to effective environmental, social and governance (ESG) disclosures for businesses.

The finding came from a survey conducted by Duff & Phelps in partnership with the International Valuation Standards Council (IVSC). The survey was conducted at the end of May at the IVSC’s event ‘Putting Value at the Core of ESG’, canvassing the opinions of 150 valuation professionals.

Respondents said they currently use a wide range of ESG reporting frameworks, with no single system having a clear majority. The respondents cited 14 different combinations of frameworks used. Some of the most popular ESG frameworks include Global Reporting Initiative (GRI) used by 33% of respondents, Sustainable Accounting Standards Board (SASB) at 32% and Task Force for Climate related Financial Disclosures (TCFD) at 25%.

Andrew Probert, managing director, sustainability accounting advisory services at Duff & Phelps, said: “Today’s results dive into the challenges professionals are facing when it comes to effective ESG reporting. Of the frameworks available, all of which are currently voluntary guidelines, none give a comprehensive overview for ESG reporting, meaning many firms use more than one. With no consistent approach for reporting between firms, it is challenging for stakeholders to compare opportunities fairly and effectively.

“With this in mind, it is no surprise that nearly half of today’s respondents see the lack of standardised and recognised measurement system as the biggest threat to effective ESG disclosures for businesses. The G7 support for the TCFD ESG disclosure frameworks reflects the spirit of the time, but it’s the first step on a very long ladder towards standardisation.

”Until the TCFD, the IFRS Foundation’s Sustainability Accounting Standards or other Government-led regulations such as the European Commission’s Corporate Sustainability Reporting Directive become mandatory, the need for enhanced due diligence, such as carbon audits, supply chain analysis and human rights violation investigations as part of an investment decision making process will only increase. It’s these measures which dig deep to instil confidence in stakeholders to ensure businesses are up-to-date with changing demand.”

The survey also found that 21% of respondents believed an indifference from business leaders was the biggest threat to effective ESG disclosures. Followed by limited checks on greenwashing (17%) and too much regulation (11%).

Mixed motivations

When it came to motivations behind ESG reporting, more than a third (35%) of respondents said that improving reputation was the primary driver for their ESG strategy and investment, almost a quarter (24%) pointed to boosting company valuation. The third most common motivation was a sense of moral obligation (17%).

Probert concluded, “There’s a clear consensus that the status quo needs to change, so it is interesting to see many professionals still regard indifference from business leaders as a primary threat to effective ESG disclosures. Hopefully the noises coming out of the G7 leaders’ summit in Carbis Bay will start to alleviate this.

“The G7 backing for TCFD is important and if the framework becomes mandatory, it will combat the acknowledged threats of indifference and greenwashing. However, it’s important to remember that TCFD is just a framework, there is still a long way to go to implement comprehensive and standardised guidelines. The TCFD framework is also not without flaws – it’s a climate-first approach and fails to effectively target the social and governance aspects of ESG.

“Without one standardised framework for reporting standards, we will continue to see firms mixing and matching various guidelines, hindering long-term process in the area. We’re still seeing high-profile cases of failed IPOs and increased divestment attributed to poor credentials in all areas of ESG.

“Despite concerns, the increased pressure on industry and government for effective ESG reporting is sparking positive change at all levels. As we look ahead to COP26, we hope to see the proposals from G7 for a mandatory and standardised ESG reporting framework ratified, setting the groundwork for an effective and reliable reporting system moving forward.”