By Thomas Kostigen
Environmental, social and governance (ESG) investing is no doubt part of the zeitgeist of 2021, with the Biden administration emphasizing climate change initiatives and backing policy programs that foster sustainability. Companies are heeding the call and crafting ever more sophisticated ESG reports.
The Securities and Exchange Commission is reviewing company financials for veracity, ensuring investors are receiving transparent and verifiable information on which to base investments. Indeed, last week the SEC told two oil companies that they must allow shareholder resolutions that would require them to discuss in detail their plans for cutting their carbon emissions.
With all the promises and propositions for better ESG practices have also come myriad standards of reporting. But which standards and protocols are the best guides for investors? According to the information and analysis firm BN Americas, the top six standards are:
1. Sustainability Accounting Standards Board practices. The goal is to identify sustainability information financially material and industry specific to produce information useful in making decisions.
2. The Global Reporting Initiative. The GRI aims to create a common language integrating different frameworks whose goal is to helping companies become more transparent.
3. The Financial Stability Board’s Task Force on Climate-related Financial Disclosures. The TCFD is embedded with the philosophy that better information will allow companies to incorporate climate-related risks and opportunities into their risk management and strategic planning processes.
4. The Climate Disclosures Standards Board. This is run by a consortium of companies and nongovernmental organizations and is focused on climate disclosure and information about climate change and environment to benefit investors.
5. The International Integrated Reporting Council. The IIRC highlights reporting and is a global coalition of regulators, investors, companies, standard setters, the accounting profession, academia and NGOs. The coalition promotes communication about value creation, preservation and erosion as the next step in the evolution of corporate reporting.
6. The Carbon Disclosure Product. The CDP is a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states, and regions to manage their environmental impacts.
BN also notes that the International Financial Reporting Standards began a major consultation in December to address the emerging ESG and SDG standards. “They opened this consultation, and they made a number of questions, and they did this consultation, so that people across the world, accounting firms, lawyers, organizations can respond,” it reports.
The hope for all of these is that investors will pay attention to where they are placing their assets and not risk investing in companies that are greenwashing, or superficially adhering to ESG practices.
Other standards include the Principles of Responsible Investing, the United Nations Global Compact, and the UN Sustainable Development Goals. These are less accounting methods and more voluntary nods for companies to industry and the financial community that they aim to do the right things.
Investors should be cautioned these are voluntary protocols and they should do their homework to read ESG reports and determine if a company is walking the walk of their rhetoric or merely paying lip services to ESG programs to attract capital. A good financial advisor can perform the right due diligence to see if reports reveal substance or are simply box checks.
The best ESG programs should adhere to top standards, and mean more than marketing.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.