Navigating ESG disclosures
In this Q&A, Maria Elena Sandalli, Manager of ESG Regulatory Affairs at Bloomberg, speaks with Nadia Humphreys, Global Head of Sustainable Finance Data Solutions at Bloomberg, about the evolving landscape of ESG disclosures, exploring recent regulatory developments and how firms can navigate compliance while leveraging ESG data to enhance financial performance.
Maria Elena: Nadia, as we know, initiatives to incentivize sustainable investing continue to multiply According to the United Nations, over 140 countries, accounting for approximately 88% of global emissions, have committed to achieving net-zero emissions.
Also according to the UN, the number of regulations supporting the transition to a sustainable economy has more than quadrupled since 2014.
This growing wave of regulatory requirements is set to drive exponential growth in the volume of environmental, social, and governance (ESG) data produced by companies and made available to investors. While this expansion offers opportunities through increased data availability, it also poses significant compliance challenges, as more companies must contend with complex regulatory demands.
Although the EU has been at the forefront of ESG regulation, an increasing number of countries are now implementing their own sustainability reporting requirements.
This trend raises concerns about potential data fragmentation and inconsistencies, complicating global investors’ ability to make informed decisions and increasing the compliance burden for companies operating across multiple jurisdictions.
So, Nadia with that context, and given the urgent need for action on climate change, how are global investors making sense of all these new ESG disclosures?
Nadia: ESG factors are widely accepted as financially relevant both at company-level and for financial organizations. The ESG profile of a company can significantly influence a company’s operational efficiency, market positioning, and long-term profitability.
One reason ESG is becoming a core priority for global investors has to do with risk management. For example, companies who are better equipped to navigate regulatory changes and operational disruptions due to climate events make more viable investment choices. Another example is governance risks; poor corporate governance can lead to financial losses, degrade shareholder value, and significantly damage a company’s reputation.
Operational efficiency is also key. Effective environmental practices can lead to significant cost saving, such as reduced energy consumption, as well as improved productivity.
Companies that prioritise social factors, such as employee well-being, diversity, and fair labour practices, often see higher employee satisfaction, reduced turnover, and increased productivity, all of which contribute to financial stability. Further reasons include access to capital, and long-term resilience and innovation.
All in all, by integrating ESG factors into financial decision-making, companies can reduce risk, improve profitability, attract long-term investors, and strengthen their reputation.
As these factors become more intertwined with financial performance, ESG is increasingly seen not just as a corporate responsibility issue, but as a critical driver of financial success making it less of a ‘nice to have’ and more as a core priority.
Maria Elena: While policy efforts on ESG disclosures have largely focused on the environmental component, what policy steps should be taken to ensure that the social and governance aspects receive equal attention?
Nadia: Social matters tend to be context-specific and systemic, not linked necessarily to single companies in a given area. Moreover, given local specificities, social standards are applied and enforced differently across geographies.
However, it should be noted that regulation around social and governance issues has been steadily increasing.
The aim is to ensure transparency, accountability, and responsible business practices in areas like labour rights, diversity, data privacy, and corporate governance. These issues are factored into regulations like the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy so that investments are not myopically pursuing climate-related outcomes at the expense of good governance and social practices.
One concern, though, is that policy intervention often asks investors to exclude companies identified as breaking global social norms. Identifying a controversy is technically challenging – should divestment occur when there’s rumours of an issue, when a case is brought to court, when a company is found to be liable? What if the company is found to be innocent of charges or if the case is settled outside a court system?
Similarly, deep rooted social issues – like child labour – are best fixed through engagement. Ideally, companies should conduct social supply chain audits, identify risks and work with suppliers to invest in fixing the issue. A divestment-only approach risks pulling capital away from high risk geographies and worsening the issue.
Maria Elena: The flurry of ESG regulations in certain regions can lead to confusion and fragmentation, creating challenges for the global investment community. How can policymakers move beyond the ESG ‘alphabet soup’ to develop a more streamlined, interoperable framework that better serves global investors?
Nadia: ESG disclosures globally have suffered from being inconsistent and vary widely across jurisdictions, company sizes and sectors. Reporting of financial data is often not aligned with sustainability reporting, and there is often a significant time lag in the production of ESG data.
These issues have made it difficult for financial firms to accurately assess and fully understand ESG-related risks. However, policy makers have stepped in to start adopting the work of ISSB (the international sustainability standards board) to create a more globally aligned framework of ESG reporting.
Whilst the adoption of this regime can still vary by jurisdiction, significant improvements have been made to provide a common, baseline set of reported ESG data.
These metrics should now reflect the ESG impact on the company’s enterprise value and be consistent with financials. In some jurisdictions, like the EU, we have also seen a push for non-financial reporting to be produced alongside financials and subject to board-level sign off, which improves the quality, consistency and cadence of reporting. We have also seen policy makers introduce measures to make sure reporting is stored in an accessible and machine-readable format.
Now more than ever it’s crucial that investors understand what is considered financially material for a company, and are able to identify the companies that are best prepared to face climate change.
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