Blackrock on the need for universal ESG reporting standards
In a whitepaper, BlackRock contends that better management of relevant ESG issues allows organizations to adapt to changing environmental and social trends, use resources more efficiently and lower their risks of regulatory or reputational damage. In fact, companies with high ratings on ESG factors show a lower cost of capital, while greater transparency of public companies in disclosing ESG data correlates with lower volatility. What’s lacking is a standardized set of relevant ESG metrics, which the firm suggests should be adapted in the same way that international accounting standards have been for financial reporting.
In its paper, BlackRock seeks to define areas in which investment managers integrate environmental, social and governance factors, as well as articulating how ESG factors contribute to long-term value. Data specific to ESG cover such metrics as sustainability, corporate governance, human rights and labor policies and are increasingly seen as indicators for operational strength, efficiency and management of long-term risk. It’s BlackRock’s contention that ESG factors can be integrated by investors in three ways:
1. Traditional investing refers to analyzing whether ESG factors exert a positive or a negative influence on the opportunity’s value;
2. Sustainable investing means incorporating ESG factors into investment decisions, usually through the prisms of positive social and environmental outcomes or by actively screening companies based on ESG metrics; and
3. Investment stewardship concerns investors engaging in the governance of targeted companies, identifying and managing ESG risks at the corporate level.
BlackRock explains that most organizations embrace the notion of reporting their ESG initiatives. However, it adds that whether referred to as CSR, corporate citizenship or sustainability, what companies say about their efforts in that regard may not have utility for investors. Having said that, ESG disclosures have evolved to the point where several standards now exist, including:
- Principles for Responsible Investment (PRI): a partnership with UNEP Finance Initiative and UN Global Compact that incorporates voluntary and aspirational investment principles to integrate investment and ESG factors;
- CDP (formerly the Carbon Disclosure Project): an NGO that collects company-reported climate change, water, and forest-risk data;
- Global Reporting Initiative (GRI): an international independent organization that communicates with a broad range of stakeholders on sustainability issues such as climate change, human rights and corruption;
- International Integrated Reporting Council (IIRC): a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs promoting value creation as the next step in corporate reporting;
- Global Impact Investing Rating System (GIIRS): a project of the non-profit B Lab assesses the social and environmental impact of companies and funds;
- Sustainable Stock Exchanges (SSE): a U.N.-organized P2P platform to explore corporate transparency and performance relative to ESG and encouraging sustainable investment;
- Ceres: a non-profit advocating sustainability leadership, comprising a network of investors, companies, and public interest groups;
- Financial Stability Board (FSB): comprised of G20 members, it established a task force to report on disclosure standards for companies on climate-related issues; and
- Sustainability Accounting Standards Board (SASB): an independent non-profit that develops accounting standards for U.S. public corporations disclose sustainability data to investors.
It isn’t just industry bodies that are involved in integrating ESG factors and investing. BlackRock points to market data providers such as MSCI ESG Research and Sustainalytics, who publish ESG and sustainability scores for thousands of mutual funds and ETFs. However, the point remains, it says, that no single set of factors can be utilized for all business groups, so organizations must be cognizant in publishing data that’s relevant for investors targeting ESG.