For all the noise out of COP26, its significance will be measured not in Glasgow but in how the final agreement will be put into action going forward. One decision that did not catch the headlines, but could have seismic implications, is the creation of the International Standards Setting Board (ISSB). Finally, this new organisation will bring clarity to the ESG ‘alphabet soup’ and establish global consistency and comparability of sustainability standards.
For those in the know, the creation of the ISSB was warmly greeted. The announcement was welcomed by the UK alongside 40 international partners from 6 continents. The immediate endorsement of the ISSB will go a long way in it delivering on its future ambitions.
With this line in the sand, it marks a major development in improving the global consistency and comparability of company-level disclosure and lays the foundation for mandatory disclosure being introduced in the future. Now the ask will be for companies to get their own ducks in a row and start demonstrating their commitment to ESG by implementing what it means within their company.
Consistent data disclosure at a company-level will bring greater confidence to investors in comparing the ESG efforts of companies’ side-by-side. It is the enabler that ESG needs to move on from the threat of greenwashing and will demystify the talk from the action. There is no underestimating the internal effort that will be required by firms to align with these new disclosure standards. However, this process should be regarded as an opportunity to embed ESG thinking across the business strategy, rather than being viewed as another onerous compliance hurdle. At its heart, ESG efforts should be improving socially conscious outcomes, it is in this spirit that they must be implemented.
The current read from the ECB is that financial services firms are failing to see this opportunity, with ESG risks poorly integrated across their practices. Their latest report ‘The state of climate and environmental risk management in the banking sector’ requested self-disclosure on the current practices of 112 significant institutions, with a combined total assets of €24 trillion. The findings are damning, with none of the institutions seen as close to fully aligning their practices with supervisory expectations. Firms know they need to play catch up, 90% of those surveyed recognised that their reported practices are at best partially aligned with the ECB’s supervisory expectations. The ECB’s report makes clear that the window of opportunity in which companies have to improve is small, with the call that firms must now adopt a strategic approach and up the pace of progress.
While the volume of noise on ESG has risen throughout 2021, next year needs to be year of increasingly harmonised action from companies. No longer will words and commitments alone be sufficient, with greater disclosure requirements soon to discern between the real progress companies are making.
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