According to some sources, there are almost 3,000 investment funds that are guided in their investment decisions by environmental criteria, social impact, and the adherence of a company to the principles and practices of good governance. These funds manage assets worth some $ 2.7 trillion. Observance of the ESG criteria in investment decisions and in business operation is becoming mainstreamed, and the compliance with these criteria is increasingly being directly related to business results.
The expansion of the number of companies that adhere to these principles is accompanied by a growing number of public policies that directly incentivize businesses’ uptake of them. At the same time, the declarative support to the principles is increasingly being replaced by actual integration of ESG principles into management practice in companies. In this context, the absence of a clear and widely adopted system for corporate reporting, monitoring and measuring ESG-related objectives and impacts is becoming an issue.
There are a number of globally adopted reporting and evaluation systems in this area [1]. However, apart from their methodological shortcomings, especially in terms of reliability, they are also not mutually comparable, so it is not possible to determine whether and to what extent the results achieved by one company are better or worse than those of others. Perhaps more importantly, they do not allow for an objective assessment of the business risks, or of company value, which is crucial for investors.
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Furthermore, none of the existing grading systems has so far found a satisfactory way to measure a company’s social performance. Namely, the principles of good governance are relatively well defined and there is a relatively clear consensus around them. The same is true for industry-level environmental standards and best practices. There is far less agreement on the impact of business on society and on the achievement of social goals, both in relation to the subject of measurement and the target values.
The International Sustainability Standards Board was established at the UN Conference on Climate Change (COP26, 2021) for the purpose of developing a comprehensive system of basic indicators, intended for capital markets. Consultations on the first two proposed standards are currently ongoing.
As early as 2013, the European Union began introducing non-financial reporting obligations, which initially applied to only 11,000 companies in the EU: large listed companies, banks and insurance companies, and companies od public interest as declared by national governments. In 2021, the Commission adopted a proposal for the Corporate Sustainability Reporting Directive[2], which will extend this obligation to all large listed companies in the EU, and to small and medium-sized listed companies. This regulatory proposal also called for the development of reporting standards, and of a monitoring and evaluation system.
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Speaking at this year’s World Economic Forum meeting, Michael Froman, Vice Chairman and President of Strategic Growth, Mastercard, said: “If we want to incentivize corporations to include the goal of progressing positive social impact in their business strategy, we need to develop metrics that reflect that.
That’s hard. It’s difficult to compare what one company does to broaden financial inclusion to what another might do to further education. Yet, that is precisely the type of commitment we want to encourage. It is going to take collective effort among companies, accounting firms, investors and regulators to get this right.
Even as we work toward that goal, one step we can each take is to embed sustainability goals into the core of our business and culture – that includes how we operate, what we measure and how we reward employees. [3].”
In addition to attracting investors, a number of additional business goals may be achieved by adhering to the principles of sustainability. Performance measurement is particularly important in this context. Daniel Schmid [4] of SAP believes that it is important to document the financial effects of non-financial indicators, as ” Double materiality assessments enable leaders to regain focus by identifying a company’s key social and environmental impacts to be addressed.”
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The draft of the mentioned EU Sustainability Reporting Standards (ESRS) [5] is currently undergoing public consultations, until August of 2022, and will be rolled out in the period from 2024-2026. The standards contain a list of information that companies will be required to publish in three main areas: environment, social impact, and corporate governance. The CSRD directive also calls for the mandatory independent verification of the accuracy and completeness of companies’ reports.
It has already been mentioned that most problems are to be expected in the area of social indicators of corporate impact. The business sector will need to adopt or source a broad conceptual apparatus in order to competently assess the materiality of its impacts, and the external evaluators will also need to find a methodology to conduct credible independent verifications.
The ESRS organizes information on social impact of companies according to groups of people that are affected by business operations. Those are: their own employees (ESRS S1), value chain employees (ECRS S2), communities affected by the company (ESRS S3) ), and end users / consumers (ESRS S4).
INC.Q Standard and certification scheme has been used to measure, monitor, and manage social impacts of business, covering the areas of gender equality and well – being of employees. Certification enables employers to measure, compare and improve their practices and results in the areas of employee engagement and retention, recognition of business purpose, equality, employee involvement, diversity, equal pay, education and career development, etc. Diana K. Dešković, founder of the Standard, commented that: “by applying our comprehensive method for ten years now, and by virtue of the related data collection and measurement, we have ample evidence on the impact of affirmative actions in the social sphere on employees lives and on business results, across a series of indicators. Companies that cooperate with us and actively work on improving their social performance are already ready for social and governance reporting under ESG.”
Literature:
1.For example, the systems of the following agencies: KLD, Sustainalytics , Moody’s ESG ( Vigeo-Eiris ), S&P Global ( RobecoSAM ), Refinitiv (Asset4) and MSCI, but also various systems developed in the context of sustainable development.
2.https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0189
3.https://www.weforum.org/agenda/2022/05/business-leaders-at-davos-how-to-deliver-esg-promises-sustainability-reporting-standards/?utm_source=sfmc&utm_medium=email&utm_campaign=2777615_Am22-Agenda -23May2022-Final & utm_term = & emailType = Agenda% 20Weekly
4.Ibid.
5.https://www.efrag.org/lab3?AspxAutoDetectCookieSupport=1
