International Sustainability Standards Board and European Union release ESG reporting standards

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG developments this week

At Ballotpedia

Ballotpedia publishes collection of ESG-related statements from state financial officers

Ballotpedia published an article on August 4 tracking statements made by State Financial Officers (SFOs) on ESG since the start of 2022. The page contains links to all the SFO statements Ballotpedia has tracked and links to biographies for each SFO. 

For more information, click here.

Around the world

International Sustainability Standards Board and European Union release ESG reporting standards

Reuters reported on July 28 that the International Sustainability Standards Board (ISSB) released its new environmental reporting standards, which were designed with the goal of simplifying global reporting and aligning regulatory agencies around the world under universal standards:

The world of global business standards is a deliberate and slow-moving one. That makes the recent release of the first International Sustainability Standards Board (ISSB) standards after just 18 months lightning quick, in relative terms.

The board’s inaugural standards are IFRS S1, which tells companies what information they need to disclose to investors about the sustainability-related risks and opportunities they face over the short, medium and long term; and IFRS S2, which sets out specific climate-related disclosures and is designed to be used with IFRS S1. …

[T]he ISSB and its standards are designed to address this disclosure fatigue, continuing a process of consolidation in sustainability standards that started a few years ago.

“I’m really excited about the new standards,” says Michiel van der Lof, global corporate reporting services leader at consultancy EY. “Investors have been asking for a globally consistent standard for many years.” …

Because the ISSB is part of the International Financial Reporting Standards (IFRS) Foundation, which also administers the International Accounting Standards Board (IASB), the sustainability standards are compatible with the financial ones, says van der Lof. “That compatibility with IASB and the connectivity between the financial and sustainability information – that is the true additional element.”

Ilmi Granoff, senior fellow at the Sabin Center for Climate Change Law and Adjunct Research Scholar at Columbia Law School, says: “The ISSB standards are not fundamentally about a world of voluntary disclosure. They are emerging at a time when we are shifting towards regulated reporting regimes, and it is really important to harmonise those, and the language that different regimes are using – that is the key to convergence.”

The potential of a global baseline has already been partially fulfilled, with both the European Union and the Securities and Exchange Commission (SEC) working closely with ISSB.

There was a big step forward last week, when the standards were endorsed by the International Organization of Securities Commissions (IOSCO). The IOSCO is now calling on the 130 capital markets regulators in the organization, which regulate more than 95% of the world’s securities markets, to consider how they can incorporate the standards into their regulatory frameworks to deliver consistency and comparability of sustainability-related disclosures worldwide. …

An analysis by CDP of G7 countries and a group of 17 European countries (which would be among the best performers on TCFD disclosure) shows that no more than 19% of the companies from any country had achieved 100% TCFD-aligned disclosure through CDP.

One key gap is the lack of disclosure on how climate-related information is fed into company strategies, while companies also perform poorly on risk management, “suggesting that they do not have sufficient processes in place to assess and manage climate risk,” CDP says.

In addition, fewer than half of companies are reporting on their supply chain emissions, or Scope 3, even though these amount to 11.4 times their direct emissions.

The European Union (EU) released its own ESG reporting standards on July 31. The environmental components of the EU standards were developed in conjunction with the ISSB:

On July 31, the European Commission adopted the European Sustainability Reporting Standards. The ESRS will standardize how companies within the European Union report climate change and other ESG related actions. They are set to go into effect on January 1, 2024.

The standards stem from the European Green Deal, which required an assessment of sustainability performance by companies. The standards, drafted by the European Financial Reporting Advisory Group, are meant to meet reporting requirements of the EU’s Corporate Sustainability Reporting Directive and Sustainable Finance Disclosure Regulation. The draft standards were initially submitted to the commission in November 2022, but EFRAG has since made substantial changes to that draft based on feedback from stakeholders and the commission. The final standards adopted by the commission are less stringent and recategorized some areas from mandatory to voluntary.

The ESRS, while featuring the term sustainability in the title, are inclusive of the broader environmental, social, and governance reporting requirements. …

There are 12 ESRS, divided into four reporting categories: general, environmental, social, and governance. General covers topics that cross over to multiple categories, like format and timelines. Two of the ESRS are general.

Environmental gets the most focus, with five standards. Those standards are ESRS E1 – Climate Change, ESRS E2 – Pollution, ESRS E3 – Water and marine resources, ESRS E4 – Biodiversity and ecosystems, and ESRS E5 – Resource use and circular economy. The commission announced that they have been working with the International Sustainability Standards Board in their development of the recently announced International Financial Reporting Standards Foundation Sustainability Disclosure Standards. …

Now that the standards are available, it is incumbent on those individual jurisdictions to adopt all or part of the standards. The environmental ESRSs are designed to work alongside and incorporate the IFRS Sustainability Disclosure Standards.

In the states

Wyoming state board pushes back against ESG

The Wyoming State Loan and Investment Board on August 2 enacted a new investment policy prohibiting ESG considerations in state investments:

Wyoming has adopted an official policy meant to push back against the environmental, social and governance (ESG) movement that critics say has undermined Wyoming fossil fuel industries. 

The State Loan and Investment Board (SLIB) voted to approve a new section of the Investment Policy Statement, which has the rule of law over state investments. 

Along with the board’s vote, an administrative rule out of the Secretary of State’s office went out for public comment that will require companies doing business with Wyoming to disclose if they are using ESG principles in their business decisions. …

With so much of the state’s investments and tax revenues tied up in oil, gas and coal, SLIB has wanted to craft a policy that would ensure that companies working for the state or handling state investments are seeking the highest rates of returns without regard to any progressive politics. …

The original policy required all individuals to act in the best financial interest to obtain the highest total return on investments for the state.

Secretary of State Chuck Gray advocated for a very specific negative message in the policy that described ESG actions as, “These investment criteria have crippled, corrupted, disadvantaged, subverted, damaged or otherwise harmed children, citizens, industry and financial well-being of Wyoming and America.” 

Gov. Mark Gordon suggested a statement that companies contracted with the state won’t consider “fashionable political or ideological” positions. 

Treasurer Curt Meier wanted to remove Gray’s statement entirely, but Gray argued feedback from asset managers who are pushing back against ESG, as well as industry representatives, had encouraged a very negative statement against ESG. 

“ESG is a woke clown show,” Gray said. 

Gray also is pursuing a separate administrative rule that, if approved by Gordon, will require investment brokers, broker dealers and securities agents doing business in Wyoming to disclose to their clients if they are using ESG principles in the course of their business.

On Wall Street and in the private sector

Bloomberg survey shows professional investors expect ESG funds will underperform the market over the next year

Bloomberg released the results of its most recent financial services industry survey on August 3. Of the investment professionals surveyed, a majority expect ESG funds will underperform the market over the next year:

The outlook for ESG is getting bleaker based on the results of Bloomberg’s latest industry survey.

Most Bloomberg terminal clients taking the survey expect ESG funds to underperform general market benchmarks in the next year, while a growing number say ESG is nothing more than a passing fad.

Bloomberg recently concluded its second survey of terminal clients to get their views about environmental, social and governance principles. The results were broadly similar to the first survey at the end of last year, though clients “not directly engaged” in ESG are becoming increasingly more skeptical about the investment strategy than those who “are engaged.”

For example, almost 90% of 116 Bloomberg terminal clients who aren’t directly engaged with ESG expect the sector’s investment funds to lag behind market benchmarks in the next year, and 55% of 181 terminal clients who are engaged in ESG — and have more skin in the game — also are pessimistic.

The pessimism doesn’t end there. Almost 70% of those who aren’t involved directly in ESG say the investment strategy is nothing more than a fad, while just 18% of those who are engaged expect ESG issues to become more critical in business and markets, down from 25% in the earlier survey. …

Comments that accompanied the survey show the enormous split that exists between those who say ESG is here to stay and those who think it’s “a politically-driven ideology that has no place in a professional investor’s decision-making.”

Roughly two-thirds of those surveyed who are engaged in ESG say the backlash will probably force firms to stop using terms such as ESG, while they continue to support efforts that lead to positive environmental, social and governance outcomes. Ultimately, however, a majority of all respondents expect politics to exit the conversation and be replaced by a more practical discussion about the future of ESG.

About half of those engaged with ESG mentioned that government regulation is the way that things will really change and 31% of those not engaged agreed.