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Data Firms See Benefits From ISSB, GRI Coordination

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Data vendors and managers have welcomed a recent tie-up between two major global ESG standards setters, saying the move would bring clarity to the opaque sustainability reporting space.

Leading companies in the ESG data space said the memorandum of understanding signed between the International Sustainability Standards Board (ISSB) and Global Reporting Initiative (GRI) would lead to better disclosures, which would benefit the entire industry.

The collaboration will see the ISSB work with GRI’s Global Sustainability Standards Board (GSSB) to establish common global ESG reporting standards for financial institutions. The move is the latest by the ISSB, which was formed by the IFRS Foundation late last year, to harmonise rules for declaring sustainability performance.

“Standardisation of ESG disclosures is an essential step towards making sustainability data more robust, decision-useful and reliable,” Inna Amasheva, ESG Research and Regulatory Solutions Head at Germany-based financial data provider Arabesque told ESG Insight. “In the long run, this entire ecosystem is likely to benefit from better defined and streamlined sustainability reporting practices.”

Reporting Obstacle

A lack of consistency across multiple standards setters has been seen as an obstacle to the widespread reporting on ESG by companies, a situation that some critics say has led to increased greenwashing by issuers of green bonds and other sustainability-linked assets.

Tim Fox, Senior Associate at data provider Element22 said “any accelerated ‘alliances’ has to benefit the industry”.

“The ESG space at present is overloaded with ‘standards’, and there is little alignment between providers, and this makes it particularly challenging for consumers of content to integrate operationally,” Fox told ESG Insight. “Although this is a generalisation, very few providers can provide complete coverage of any given data set, with the result that consumers need to acquire content from multiple providers to achieve complete coverage.

“This in turn leads to increased cost, and the downstream challenge of having to map between standards – by no means an ideal situation.”

Janine Hofer-Witter, Senior Product Manager, Financial Information at SIX similarly welcomed the move.

“As the landscape becomes increasingly complex, it is becoming more difficult to track the various regulations that investors must adhere to. Financial service providers that are active internationally would certainly benefit from a more globalised regulatory landscape. There is a need for more standardisation on a global scale,” Hofer-Witter said.

“I look forward to more standardised, complete, and assured corporate social responsibility (CSR) reporting from companies that will serve as a reliable input for asset managers and investment firms to make sustainable investment decisions and disclosures to clients.”

Important Milestones

The ISSB-GRI announcement came days after the US’ financial regulator, the Securities and Exchange Commission (SEC), said it would begin setting climate-related disclosure rules, including the so-called Scope 3 emissions of supply-chain partners and downstream customers, on financial institutions.

Both events were seen as important milestones in bringing global alignment on measures to ensure companies, and the investors that back them, contribute to reaching the Paris Agreement’s climate targets and healing social divisions.

“This will help lead to more comparable, consistent reporting by all companies, and that will benefit the data companies because it is more aligned, it is more clear what companies are supposed to report,” GRI spokesman Peter Paul de Wijst told ESG Insight. “That will make it easier for them to create a product that works – and that’s relevant for their customers.”

A statement from the two organisations said they would work together to bring about “two pillars” of sustainability reporting: one focused on capital markets under the IFRS Sustainability Disclosure Standards developed by the ISSB; and the other set by the GSSB to meet “multi-stakeholder” needs. The MOU will see the two bodies sit on each other’s consultative bodies.

Describing the tie-up as a “really a significant step forward” in harmonising standards globally, De Wijst said that data providers would be able to offer more targeted services to clients. The convergence of standards setters would make reporting simpler and more streamlined.

“Terminology, disclosure and definitions will be aligned as much as possible,” he said. “From a reporting company’s perspective, it will reduce that burden, and it will make it more clear, and it will allow them to collect the information once and use it appropriately with various stakeholders.”

The ISSB’s formation was announced in November at the COP26 climate summit in Glasgow, Scotland. Among its first announcements was the consolidation by June this year of the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF), which houses Integrated Reporting and SASB Standards.

The ESG reporting standards recommended by the GRI are the most-used by companies and financial institutions.

Simplification of ESG reporting was necessary if the financial sector was to avoid a “mission impossible for investment management and positive portfolio performance”, said Martina McPherson, Head of ESG Strategy and General Management Committee Member at ODDO BHF Asset Management & Private Assets.

“The alphabet soup of ESG has led to divergence and an aggregate confusion around ESG. Meanwhile, we also have to ensure that we are not creating unmanageable layers of ESG complexity where thresholds and criteria for ESG in portfolio construction are concerned.”

Next Step

While the collaboration between the ISSB and the GRI would being alignment between the two main ESG standards organisations, de Wijst argued that the two were complimentary anyway and that their recommendations had formed the basis of many reporting companies’ strategies.

The next step will see the ISSB publish its Climate and General Sustainability-related Disclosure requirements this week, which will form the basis for its eventual climate-related disclosure standards.

“What this will create is a global system of comparable information… this becomes almost the core on broader regulations that fit local needs,” said de Wijst.

He added that the speed with which this agreement was achieved signalled that convergence of global standards would not be far off. Arabesque’s Amasheva predicted, however, that the road would not be an easy one.

“ESG data is following in the footsteps of financial data reporting and accounting that evolved into a more coherent and harmonised system over the 20th century,” she said. “This is also a transformation that is not going to happen overnight, but will need a sustained effort from multiple interconnected stakeholders, including corporates, financial markets, standard-setters and policy-makers themselves.

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