Proof that green investment is becoming steadily more mainstream emerged early this year with the launch of the Corporate Forum on Sustainable Finance: a group of major companies that have joined forces to devise best-practice methods for nudging financial markets towards encouraging greener goals.
Unveiled without significant fanfare – and yet to open an official website – the Forum nonetheless packs a weighty punch. Its 16 launch partners, who operate mainly in the energy, transport and infrastructure fields, together account for more than two thirds of green and sustainable bond volumes issued by European corporates.
Since its January 2019 inception, the Forum has added a further five companies to its roster. Among its members are SSE, Orsted, Iberdrola and Tideway.
In its launch statement, the Forum said it regards sustainable-finance instruments as “efficient, market-based tools that allocate the economic resources where they are most needed – particularly to low-carbon and sustainable investments – which are central to the members’ corporate strategies”.
As such, the Forum aims to:
It is that final point – the importance of environmental, social and governance (ESG) reporting, and the need for corporates to do it well – that has been increasingly occupying the minds of key stakeholders in the investment space, from industry groups to policymakers.
The push is on for all corporates to get with this particular programme.
Helpfully, some of the biggest voices leading the ESG reporting charge are stock exchanges.
In February 2017, for example, the London Stock Exchange (LSE) got its foot in the door by releasing Your Guide to ESG Reporting: guidance for issuers on the integration of ESG into investor reporting and communication.
Crucially, the report carried a quote from Legal & General Investment Management CEO Mark Zinkula, saying: “ESG reporting is not just for larger companies. This is about all issuers, regardless of size, reporting relevant and material information to investors so that they can make better-informed investment decisions.”
Among its recommendations, the LSE encouraged the use of reporting as a complement to dialogue around ESG, rather than as a means for firms to duck out of the broader debate on the grounds that they have provided all the necessary details, so need not do anything further.
In terms of how companies should present their data, the report urged them to:
Welcoming the LSE report, Dimitris Tsitsiragos – then-vice president, new business, at the International Finance Corporation – said the guidance would “facilitate the connection between sustainable companies and investors”, adding: “We welcome this step and hope other stock exchanges around the world will follow suit.”
They did.
At the ACT Annual Conference in May, one of the most illuminating Day One panel talks was ‘Sustainable Finance: is ESG the new CSR?’ In that session, attendees heard that NASDAQ had published version 2.0 of its own guidance for ESG reporting, bringing the stock exchange perspective on this field firmly up to date.
In his foreword to the guidance, NASDAQ president Nelson Griggs showed just how far things had moved on. “Expanded choice and opportunity in the new markets economy requires more data to drive decision-making,” he wrote.
“ESG data points have become useful tools – not only for investors seeking performance indicators, but also for public companies trying to increase operational efficiency, decrease resource dependency and attract a new generation of empowered workers.”
The overarching message: the more companies report on their ESG activities, the sharper they’ll get at business fundamentals. By regularly holding up a mirror to their inner workings, they will be more likely to disclose areas for improvement.
NASDAQ’s guidance provided a much more detailed breakdown of the types of data firms should include in their reporting than those suggested in the LSE’s version, listing 10 points for each prong of the environmental, social and corporate governance trident.
It also set out eight new trends in the global capital markets that are not only driven by, but <em>drivers of</em> a greater integration of ESG into the value chain:
NASDAQ quoted from a recent statement on ESG reporting from the International Organization of Securities Commissions (IOSCO): “ESG matters, though sometimes characterised as non-financial, may have a material short-term and long-term impact on the business operations of the issuers, as well as on risks and returns for investors and their investment and voting decisions.”
With all those factors in play, it would be natural for policymakers to step in and bring their influence to bear on the evolution of ESG reporting. And in June, that is exactly what happened.
On 18 June, the EU’s Technical Expert Group on Sustainable Finance (TEG), established in July last year, published the final draft of its proposals for an EU Green Bond Standard (EU-GBS).
In the draft’s introduction, the TEG asserted that the proposed standard would “enhance the effectiveness, transparency, accountability, comparability and credibility of the green bond market without disrupting [it]” and encourage issuers to put their bonds on the market as ‘EU Green Bonds’.
Interestingly, the proposals also include a section on reporting, which EU-based green bond issuers would be advised to bear in mind when compiling their ESG data, should the EU-GBS be implemented.
Under current market practices, the TEG explains in the proposals, issuers tend to report on the allocation of funds to green projects at least annually, until full allocation is achieved.
Those reports typically include details on the proceeds an issuer has raised with a green bond, plus data on the amounts allocated to green projects. In addition, the TEG notes, “an increasing number of issuers provide investors with impact reporting, either on a project-by-project basis or on a portfolio basis”. Those impact reports will outline either quantitative impacts, or qualitative impacts in cases where quantitative reporting is not feasible.
At present, those reporting arrangements are not formalised. As such, the EU-GBS would take the two main threads and standardise them, so every issuer would systematically provide allocation reporting and impact reporting.
Every firm would also be required to produce a Green Bond Framework (GBF) for each bond in the green class that they issue, outlining use-of-proceeds plans and the overarching strategy and processes behind the bond(s) at the point of issuance.
So, under the proposed Standard, allocation reporting would include:
Meanwhile, impact reporting would encompass:
Allocation and impact reports can be provided either on a project-by-project or portfolio basis, depending on whether confidentiality agreements, competitive considerations or a large number of underlying projects limit the amount of detail that issuers can provide. Both forms of reporting should be published on the issuer’s website, or any other public communication channel.
Meanwhile, the GBF, valid at the point of issuance, together with a Final Allocation Report and an impact report released upon full allocation, shall remain publicly available until the relevant EU Green Bond(s) have matured.
All of which would give corporates quite a lot to do.
Interestingly, on the same day that the EU published the TEG’s final green bond proposals, it also unveiled a far wider set of guidelines designed to encourage corporates and financial institutions to be more rigorous in their disclosures about the environmental effects of their business activities.
Intended to supplement national laws transposing the EU’s Non-Financial Reporting Directive of 2014 (2014/95/EU), the new guidelines state: “Without sufficient, reliable and comparable sustainability-related information from investee companies, the financial sector cannot efficiently direct capital to investments that drive solutions to the sustainability crises we face, and cannot effectively identify and manage the risks to investments that will arise from those crises.”
They add: “Corporate disclosure of climate-related information has improved in recent years. However, there are still significant gaps, and further improvements in the quantity, quality and comparability of disclosures are urgently required to meet the needs of investors and other stakeholders.”
The twist? Unlike the 2014 Directive, which is a legislative instrument, the guidelines themselves are non-binding. Indeed, the same can be said for the EU-GBS: if it is eventually implemented, it will work purely as a voluntary arrangement, and its rules would apply only to corporates who sign up to the scheme.
However, the initiative would be supported by a range of accredited verifiers to ensure that EU Green Bonds are of a reliably high standard. And the EU’s desire to add reporting guidelines related specifically to firms’ climate impacts as an addendum to legislation that already exists is significant: it suggests that the formalisation of such messaging in future regulations can’t be too far away.
For corporates, the imperative is clearly to get good at ESG at a time when it’s not mandatory – rather than have to play catch-up at a time when it is.
Matt Packer is a freelance business, finance and leadership journalist