A common challenge when focusing on the S in ESG is around how you measure it – and how do you obtain and use the data. At the Finance for Impact Summit, Sacha Sadan, Head of ESG at the Financial Conduct Authority; Jonathan Labrey, Chief Policy Officer, ISSB, Catherine Howarth, CEO, ShareAction and Clara Barby, Senior Partner, at Just Climate shared their perspectives on the topic from a policy and regulatory standpoint.
How should we define the metrics?
Clara Barby notes two key points on this issue. The first is that it requires a change in how we think about the S. Ultimately, the S is about people – whether that’s customers, employees, or communities – and business and finance already look at their impacts on people in terms of their decision-making.
The second point was that while we do need metrics to measure social impact, it should be noted that performance on a metric is meaningless without a threshold – an idea of what is ‘good enough’. For example, emission data without a net zero target and/or transition plan is not particularly useful and company metrics on employee pay is largely meaningless, unless we have an idea of what a living wage is. Barby considered whether the industry get to a point where it can agree what is ‘good enough’ on these key metrics relating to people.
Sacha Sadan set out the FCA’s position on data. A current development is the debate around ESG ratings and the confusion around the methodologies used (giving the example of where oil and gas companies can end up with higher overall ratings than Tesla due to their enthusiastic carbon offsetting). As a result, the FCA has recently stated that it would step in and regulate ESG ratings.
Elsewhere, Sadan noted that FCA would be pushing companies to provide data on diversity and inclusion (including socio-economic), so investors can use that in their decision-making. He noted that while listed companies were fairly good in providing this information, the response rate so far had been ‘pretty patchy’.
Can a global framework help us?
It is widely understood that ESG metrics and only really be effective if they are applied and used consistently on an international basis.
Jonathan Labrey gave an overview of his work in developing and promoting the adoption of the Integrated Reporting Framework, that sets out financial and sustainability disclosures. Labrey explained that this is a voluntary principles-based framework that is globally applicable (and had now been adopted by around 70 countries). He noted that the next step was the establishment of the new International Sustainability Standards Board (ISSB), working under the governance of the IFRS, which would provide a global baseline of high-quality sustainability disclosure standards, which would be complemented by jurisdiction-level requirements.
Labrey explained that you can never create one organisation that is responsible for all disclosures standards for the whole world, as individual countries have specific public policy requirements – but organisations such as the ISSB can help with a global baseline that helps different jurisdictions compare standards and information.
In terms of how these principles result in regulation, Sacha Sadan noted that the FCA works to put international voluntary codes onto a mandatory basis in the UK – as it had done previously with TCFD standards. Sadan said that the FCA would be looking to do something similar on the ISSB. He stressed that it is important for the standards to apply internationally, so there is one metric on supply chain, diversity and other social issues – so we are using the same language on products and impact.
The labelling debate
The other area of focus for the FCA is labelling. Sadan said he was concerned that labelling standards and KPIs should be brought in quickly to help consumers understand and trust in impact investing products. If not, we would rapidly run into a backlash as we have seen with greenwashing – with the potential for ‘impact washing’ to become widespread.
While progress on these issues was welcomed, a note of caution was voiced by Jonathan Labrey, who warned against organisations adopting a siloed-based approach to measuring the S in ESG and incorporating too many new frameworks. He said that in his role, he was trying to get out of the “alphabet soup” of different frameworks and standards and instead consolidate and combine the good work that already exists.
The reason for this was to ensure that we elevate reporting and consideration of social issues within companies – away from compliance and more towards the board-level governance, so they are integrated within the strategy and business model of firms. He noted that if we create too many detailed processes and frameworks on this issue, it risks being delegated to compliance functions of businesses, rather than be considered as a corporate governance issue.
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