Leaders of the ‘Big Four’ accountancy firms have come together to unveil ESG reporting standards.
What are the ESG reporting standards?
The Environmental, Social and Corporate Governance (ESG) reporting standards are criteria for measuring the sustainability and societal impact of an investment in a company or business.
While investment has always traditionally been measured on financial return, there have always been other factors. These factors could include political, ethical, and environmental reasons.
The ESG originally came from Socially Responsible Investing. The first instance of Socially Responsible Investing was actually around 200 years ago, when there were protests against investing in companies making weapons. There was also a similar protest during the Vietnam war.
The difference between Environmental, Social and Corporate Governance and Socially Responsible Investing is that the ESG standards are considered to make financial sense too. This is slightly different to Socially Responsible Investing, as this is based solely on moral grounds.
The term ESG was first used in 2006 in a UN report. The report first highlighted the need to take into consideration these factors when evaluating the financial viability of investments. Now, ESG is considered integral when it comes to business.
In practice, the ESG standards measure a company’s performance in terms of environmental impact, employee relationship management and boardroom diversity.
Why are the Big Four involved?
The Big Four have clients that, combined, are effectively the majority of all public companies. Therefore, it makes sense for them to be involved in the ESG reporting standards.
The World Economic Forum and International Business Council partnered with the four companies to make the initiative happen. The aim of the initiative is to encourage IBC members to adopt the new standards for their 2021 reporting.
If successful, this will be the first co-ordinated approach to ESG reporting. This will hopefully result in an increase in investments into the sector.
The Global Chief Executive of Deloitte told the Financial Times;
‘It is important for us to have a common set of standards and if there is widespread adoption it will lead to a change in behaviour’
The framework has 21 core metrics and 34 extended metrics. The metrics cover a range of issues, from emissions to gender and pay ratios. The aim of the framework is to essentially streamline all the factors, rather than have multiple different frameworks companies can adopt.
What are the factors?
With the growing threat of climate change, the demand to invest in clean energy has become louder than ever. The Environmental aspect of the ESG guidelines calls upon companies to consider sustainability and climate change in their investment choices.
This encompasses everything from human rights to diversity to consumer protection. Recent events have led to many companies evaluating their diversity and inclusivity efforts. Therefore, expect this continue well into the future.
This includes how the company is run and relationships with employees. This also includes equal pay for all genders and executive bonuses.
Investments defined by ESG reporting standards have grown hugely in recent years. Now many large companies have departments dedicated to ensuring these standards are met. There has also been a rise in boutique consulting firms specialising in just that.
However, there are still many other different frameworks that companies can follow. These include initiatives by the Bank of England, the Sustainability Accounting Standards Board and the Global Reporting Initiative. Therefore, it remains to be seen how many companies will sign on to this one. That said, with the big four accounting firms backing these new standards, this may push more companies to adopt this initiative.