Lack of standardised ESG reporting ‘biggest threat’ to effective disclosure

Businesses are using up to 14 different frameworks to report on ESG

Businesses are using up to 14 different frameworks to report on their ESG credentials, causing much confusion for stakeholders who unable to compare like-for-like to call.

Research from Duff & Phelps found that almost half of valuation experts believe the lack of a standardised and recognised measurement system is the biggest threat to effective ESG disclosures for businesses.

Andrew Probert, managing director, sustainability accounting advisory services at Duff & Phelps, said while groups are putting in the effort to report on ESG as there is no standardised system, and no requirements to report in a certain way, there is variety and inconsistency making it difficult for investors.

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“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.”

Some of the most popular current 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%.

Probert noted that TCFD is becoming mandatory but it will be a slow process before we see widespread adoption.

“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.

“It’s also 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,” he continued.

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Probert added until TCFD is mandatory, the IFRS Foundation’s Sustainability Accounting Standards or other government-led regulations such as the European Commission’s Corporate Sustainability Reporting Directive should be adopted as “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”.

“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,” Probert added.

Other threats to effective ESG disclosures highlighted in the study were an indifference from business leaders on reporting, cited by 21% respondents, followed by limited checks on greenwashing (17%) and too much regulation (11%).

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...