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Can better corporate disclosure boost sustainable investment?

Explore the importance of data and disclosure standards in sustainable investing solutions

The sustainable investment revolution is picking up speed. Issues such as climate change, environmental pollution, biodiversity, human rights, business ethics and corporate governance are now at the forefront of public attention. And greater numbers of investors have signed up to global initiatives, such as the United Nations backed Principles for Responsible Investment (PRI), to help catalyse change in these areas.

However, there’s a stumbling block: inconsistent, low-quality and patchy data. Investors need better data and better ways to measure it in order to build sustainability into their funds and investment products.

What’s wrong with the data?

There’s been a decade-long push to improve standards of environmental, social and governance-related (ESG) metrics and disclosure across the corporate sector.

In 2015, the G20 Financial Stability Board (FSB) set up an industry-led task force on climate-related financial disclosures (TCFD) to design a better transparency framework. Its goal – set out in 2017 with the publication of TCFD’s recommendations – was to enable financial market participants to better understand their climate-related risks.

But ensuring that extra-financial disclosures catch up with mandatory financial reporting is a tough challenge. And it’s one where the industry is still falling short, according to many observers.

“Gaps in ESG metrics continue to make it difficult for investors to compare the sustainability performance of different companies,” says Arne Staal, CEO, FTSE Russell.

According to amongst almost 200 global asset owners, the lack of standardisation in ESG data, scores and ratings is the most commonly cited barrier to the increased adoption of sustainable investment, with 59 per cent of survey respondents stating this as their primary concern.

Almost half (45 per cent) of survey respondents expressed concern about the quality or consistency of corporate reporting and disclosures, while 42 per cent are concerned about the availability of ESG data and the use of estimated data, helping fuel allegations of ‘greenwashing’ at companies and investment product providers.

Perceived barriers to sustainable investment adoption

Source: Sustainable Investment: 2021 global survey findings from asset owners, FTSE Russell, an LSEG business


The need for transparency and objectivity

Transparency is a necessary first step in ensuring that sustainability/ESG data is fit for purpose. It is critical in driving accurate investor information, public discourse and regulatory guidance, and also helps achieve positive outcomes both within finance and across society. In fact, over two-thirds of the asset owners who participated in the annual FTSE Russell asset owner survey said that climate and carbon are their priority focus area when seeking to invest sustainably.

Sustainability data should be measured as objectively as possible, which is not an easy task. Early ESG databases tended to focus on companies’ operations, rather than their products, services or supply chains. It’s hard to expect companies to be able to report on the broader social and environmental impact of their products and services in an objective and measurable way as they report on their own activities, but this is a goal financial market participants need to set themselves. What could be an important first step in ensuring the comparability of corporate sustainability data has been made by the EU, with new guidelines that require companies to report on the proportion of revenues, operational and capital expenditures that are ‘green’. FTSE Russell’s Green Revenues data model and Classification System, launched in 2015, offered an early example of how to do this: going beyond the traditional focus on how a company operates and measures green revenues in terms of products and services.

Sustainability issues of priority focus

Source: Sustainable Investment: 2021 global survey findings from asset owners, FTSE Russell, an LSEG business


Despite these steps, when comparing demand from asset owners to the current state of affairs, only half of the companies in Refinitiv’s ESG database currently report on CO2 emissions. As a result, Refinitiv has developed sophisticated carbon models based on a transparent methodology, providing clients with an estimated carbon emissions value when a reported value is not available.

Better sustainability data opens the door for asset managers and asset owners to employ a range of new applications to mitigate risk and generate performance. 

Two-way communication on sustainability

Improved information flows between asset owners and investee companies could also help reinforce the trend towards sustainable investing.

Asset owners and asset managers may wish to tell companies which metrics they prioritise and wish to assess, while corporations can play their own role in ensuring the supply of transparent, accurate and comparable sustainability/ESG data for the financial industry.

As world leaders gathered in November 2021 for the 26th United Nations conference on climate change (COP) in Glasgow, pressure was increasing on politicians, business leaders, the finance sector and policymakers to follow scientists in setting out a path towards more sustainable development. 

Many factors will play a role in determining the success of this important and long-awaited COP. But improved ESG data, better disclosure and higher standards of corporate reporting will play a crucial role in helping move things forward to a net zero future.

FTSE Russell and Refinitiv. Two trusted names. One sustainable investment destination.