Corporate transparency

Toby A.A. Heaps, CEO and co-founder of Corporate Knights Inc. and publisher of Corporate Knights Magazine 

The article was sourced from CorporateKnights

Improving sustainability disclosure requirements

Euronext Amsterdam

Considerable effort goes into sustainability reporting, but to what end? On the critical issue of climate change, we now have a potentially game-changing answer from finance ministers: to protect the financial system. Last year, G20 finance ministers asked the Financial Stability Board (FSB) to consider how the financial sector could take account of the risks climate change poses to our financial system. The upshot is an FSB climate task force report due later this year that will recommend consistent climate-related financial risk disclosures. The recommendations will penetrate the financial mainstream standard-setters in a way that previous efforts by NGOs could not. The G20’s Green Finance Study Group, created under China’s presidency, provides a valuable forum for such recommendations to be taken up.

Climate disclosure is just one part of sustainability disclosure, but it is a good starting point because no other issue is as important for both the health of the financial system and future of our civilization.

As policy-makers grapple with how to improve disclosure on these vital issues, this year’s Measuring Sustainability Disclosure: Ranking the World’s Stock Exchanges report offers two essential insights.

Number one: Mandatory and prescriptive sustainability disclosure requirements work. Countries that have them lead; countries that don’t lag. This may seem like an obvious proposition, but when we first started measuring the state of sustainability disclosure five years ago, the conventional wisdom was that the best way forward was to issue principles based guidance. We now have evidence that the “report what you feel you like” approach in the absence of minimum mandatory standards is not a recipe for useful disclosures. With the exception of Switzerland (which is affected by its European context), all of the top 10 exchanges are domiciled in countries with mandatory sustainability disclosure requirements, and the converse holds for the bottom 10 exchanges (with the exception of the Shenzhen Stock Exchange, likely due to enforcement issues).

Number two: Corporate sustainability disclosure is not keeping up with the changing world. Much progress has been made improving sustainability disclosure over the past 10 years (most notably at the stock exchange level by the Stock Exchange of Thailand, Bolsa Colombia, Shanghai Stock Exchange and Nasdaq), but this progress has significantly tapered off over the past five years. Despite the landmark Paris climate deal, the majority of large companies still do not disclose any greenhouse gas emissions data. In fact the only metric tracked in this report that is disclosed by the majority of large companies is payroll, which by no coincidence is covered by International Financial Reporting Standards (IFRS).

100_1Bill Gates remarked that, “Most people overestimate what they can do in one year and underestimate what they can do in 10 years.” As the map of corporate sustainability disclosure takes shape across the world, this report provides a useful window into the state of progress. Over the past five years, it has been heartening to see a gathering appreciation that sustainability reporting is an essential precondition to safeguarding our most cherished assets.

The task for the next five years is to take a lesson from the old joke about the drunk who lost his keys:

A policeman questions a drunk man searching for something under a street light. The drunk says he has lost his keys, and the policeman joins in the search. After searching for a few minutes, the policeman asks whether the drunk is sure he lost them here, and the drunk replies no, that he lost them in the park. The policeman asks why he is searching here, and the drunk replies, “This is where the light is.”

Therein lies our challenge. Investors and insurers decide how to allocate capital and price premiums based only on available information. But right now, much of the information necessary to assess critical mega-risks, such as the transition and litigation risks posed by climate change, remains in the dark. Accounting standards-setting bodies are in a unique position to install street lamps around these risk-relevant factors.

Only with the right information can investors and insurers fulfill their critical role as we transition to a sustainable economy. Let’s make sure their path is well lit.