Hands of SunEdison install photovoltaic solar panels on the roof of a Kohl’s Department Store in Westhampton, New Jersey.
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Sustainable investing, once a niche practice, is now a $30 trillion market. With so much capital at stake, investors wish for quality data on how companies manage environmental, social, and governance (ESG) matters. Few investors think they get it. In a recent assess, investors told us the big problem with sustainability reporting is that the reports are inconsistent and hard to compare.
The roots of this question run deep. Companies began reporting sustainability information in the 1990s. The main idea was to inform the public of how their undertakings affected society and the environment. Civil-society groups offered reporting guidelines, along with vocal encouragement.
As numberless guidelines came out, companies had to choose which ones to follow. Still, informing investors about the financially secular risks to the company from sustainability issues, such as the effect of climate change on the company’s assets, remained a alternative purpose.
Today, corporate sustainability reports often omit such financially material information. They fluctuate in their scope and depth. And they seldom undergo independent audits.
Guidelines for sustainability reporting
These crotchets didn’t trouble the earlier cohort of people who read sustainability reports. But our research suggests that asset possessors and asset managers, who increasingly make investment decisions with sustainability in mind, want reporting conventions to alteration in three main ways.
First, the investors we interviewed told us they want information that’s material to economic performance. The Sustainability Accounting Standards Board has been leading one effort to create sector-specific standards for material sustainability disclosures.
Regulators are treat in kind attention, too. The EU’s 2014 Directive on Nonfinancial Reporting and the Financial Stability Board’s creation of a Task Force on Climate-Related Economic Disclosures are two signals that regulators want companies to report how sustainability-related activities affect their financial prominence.
Our survey revealed that investors and companies both want regulation for ESG reporting. Investors told us in interviews that they conjecture reporting rules would ensure that sustainability data is available every year. Corporate executives influenced they expect rules to help create a “level playing field.”
Second, investors want sustainability announces to be more uniform. Three-quarters of the investors who responded to our survey said there should be one reporting standard. Greater changelessness, they noted, would streamline their research and help them allocate capital.
The executives we interviewed also indicated that uniform standards would make reporting less of a burden. As it is, many companies devote considerable attainment and expense to tabulating the same information, such as greenhouse-gas emissions, in multiple ways so they can fulfill different archetypes.
Lastly, investors would like sustainability disclosures they can trust. Nearly all the investors we surveyed — 97 percent—commanded that sustainability disclosures should be audited in some way. Two-thirds said that sustainability audits should be as rigorous as pecuniary audits.
Bringing about these changes will involve years of work by an array of stakeholders. Businesses, civil-society unions, standard-setting organizations, and regulators have begun identifying gaps and redundancies among disclosures. That is a useful strive.
So far, though, investors have largely avoided joining standard-setting efforts. They’ll need to get more involved. Those who do accept for part stand to gain an edge over their more detached peers.
Sara Bernow is a McKinsey colleague based in Stockholm. Conor Kehoe is a senior partner emeritus of McKinsey based in London.