Investors and boards are paying greater attention to ESG. Is greater assurance needed?
An increase in the range and detail of environmental, social and governance (ESG) disclosures in corporate reporting has started to drive interesting conversations between listed companies, investors, regulators and auditors.
At a recent event held by KPMG UK’s Investor Insights team, several institutional investors shared their views on ESG reporting, noting that the combination of incoming regulation and broader public and capital market sentiment has the power to drive changes in investment trends markedly in the coming years.
Here are a few of the insights we gathered.
Our recent publication Impact of ESG disclosures explains that, under EU requirements, investment managers will have to disclose how they have integrated sustainability risks into their investment decision-making processes by the end of 2020.
Further, in the UK, all large asset owners – along with listed companies – will be required to provide disclosures in line with the Task Force on Climate-Related Disclosures (TCFD) by 2022.
Notwithstanding incoming regulation, investors are also seeing beneficiaries increasingly request consideration of ESG factors in their investment mandates.
Investors that we spoke to identified several implications for capital markets in the near future.
How investors are using ESG disclosures – Investors noted that there are few specific ESG metrics that investors were consistently using industry-wide when analysing various sectors, and that it was more a case of how the ESG disclosures being provided fit into the bigger picture.
Investors that we spoke to indicated that quantitative ESG metrics appear to be driving capital allocation decisions rather than individual company valuations, whereas qualitative disclosures tended to be accounted for by applying a risk premium when valuing the company, as appropriate.
Impact on credit ratings – Credit ratings agencies will have to include ESG factors in their ratings by 2022 – this means that the regulation will have impacts well beyond companies with listed equity. An organisation’s cost of capital could change if ESG integration in the credit ratings process results in a change in rating.
Possible changes in investment strategy – Investors highlighted situations in which institutions might make very different investment decisions post-2022 compared with those they currently make. For example, a ‘deep value’ fund that would previously have bought a coal mining company after a steep share price fall might not be able to do so in a post-2022 world in which investments in thermal coal are much more difficult to justify.
Clear need for a common framework – Investors present at our event all agreed on the need for a common reporting framework for ESG disclosures. They noted that the TCFD requirements could help drive corporate reporters in a common direction, but also indicated that the Sustainability Accounting Standards Board’s (SASB) framework was also gaining popularity.
ESG disclosures – like most corporate reporting disclosures outside of the financial statements – are not subject to assurance. However, the increasing importance of these disclosures indicates that this is an area for further consideration as part of the conversation over the future of audit.
Investors that we spoke to did not reach a clear consensus on what level of assurance might be needed over ESG disclosures, with some debate over whether the markets should push for assurance of existing disclosures or wait for better/more consistent disclosures to emerge, given that the quality and quantity of disclosure varies from one company to another.
We’re keen to hear the views of investors on these topics. You can visit our Investor Insights web page for more information, or contact us at email@example.com.
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