The group’s recommendations urgently call for the global standardisation of ESG reporting requirements to help “build back better” after COVID-19.
By Paul A. Davies and Michael D. Green
On 5 August 2020, Global Investors for Sustainable Development (GISD) Alliance released to the European Commission their July 2020 report, titled Renewed, Recharged and Reinforced: Urgent actions to harmonize and scale sustainable finance.
The report provides recommendations and strategic considerations to enable leaders from public and private sectors to “harmonize objectives, coordinate global standards and align efforts to facilitate, promote and scale up investment towards the [United Nations Sustainable Development Goals (SDGs)]”.
Last year, António Guterres, the United Nations (UN) Secretary-General, established the GISD Alliance as part of the UN’s Strategy for Financing the 2030 Agenda for Sustainable Development. The GISD is composed of 30 private sector CEOs, chosen for their ability to provide leadership in mobilizing resources for sustainable development.
The report first sets out the GISD’s manifesto, before going on to identify 64 recommendations to provide “benefits to the investment paradigm for sustainability and the SDGs”. The report highlights that while the recommendations are global in scope, the varying “development stages and needs of all countries, especially developing countries, should be fully noted and respected”.
The Impact of COVID-19
The GISD co-chairs, in their forewords to the report, acknowledge the dramatic implications of the COVID-19 pandemic on sustainable development, leading the group to enhance its focus and commitment to advancing the GISD’s goals in the context of “building back better”. They echo the Secretary-General’s call that “everything we do during and after this crisis must be with a strong focus on building more equal, inclusive and sustainable economies and societies that are more resilient in the face of pandemics, climate change, and the many other global challenges we face”. The co-chairs expressly state “this report calls on all actors of the investment chain to live up to their historic responsibility to deliver a sustainable recovery”.
While the GISD’s recommendations span several topics, the alignment of ESG disclosure and reporting requirements emerge as a key theme. The report notes that the global harmonisation of ESG disclosure requirements is both “essential to promote sustainable investment” as well as maintain market liquidity. The report highlights that “a relevant, coherent, harmonized, and mandatory disclosure framework would have benefits throughout the investment ecosystem and accelerate sustainable investment flows”. Additionally, the report identifies that insufficient data and poor data usability is hindering the growth of sustainable finance, and states that the data and methodologies employed by ESG scoring firms should be more transparent.
The report’s recommendations include:
- Endorsing the efforts of the Basel Committee’s high-level Task Force on Climate-related Financial Risks to develop a framework for ESG risk supervision applicable to global financial institutions. The new Basel Task Force work should be aligned and coordinated with the ongoing work of the Network of Central Banks and Supervisors for Greening the Financial System, with a view to ultimately conforming their efforts.
- Requiring mandatory sustainability reporting for financial and non-financial institutions, including disclosures recommended by the Task Force on Climate-related Financial Disclosure. These disclosure requirements should be globally harmonized, and extend beyond climate metrics to include material SDG-related information and forward-looking data. Reporting requirements should include sector-specific components as well as sector-independent factors consistent for all firms. Small and medium-sized enterprises could be subject to a “disclose-or-explain” standard.
- Ensuring regulators focus on metrics harmonisation and methodological transparency. While mandatory action on the former is urgent and necessary, a non-regulatory approach for the latter might suffice in the short-term.
- Encouraging the G20 to call on the International Accounting Standards Board and the Financial Accounting Standards Board to integrate material sustainability disclosures into their respective accounting standards in an internationally consistent manner. Doing so would drive coherence in reporting and disclosure of material, long-term sustainability issues, as well as impact how reporting companies are contributing to the SDGs.
- Urgently increasing the quality, ambition, and standardisation of the Voluntary National Reviews (made under the UN 2030 Agenda for Sustainable Development) and Nationally Determined Contributions (as required by the Paris Agreement). National capital-raising plans should be an integral part of the national development strategies for the SDGs. An international platform for the development of investable national capital-raising plans and transaction-oriented investor engagement should be established to accelerate this effort, drawing on the model of the UN Intergovernmental Panel on Climate Change, and formally incorporating membership from the finance sector and global regulators.
The recommendations reflect a wider movement within the ESG space towards greater harmonisation. Other global collaborations have also recently started initiatives to help standardise ESG disclosures, for instance the Partnership for Carbon Accounting Financials’ recent proposal for a Global Carbon Accounting Standard (see this post for more details).
Latham & Watkins will continue to monitor developments in this area.
This post was prepared with the assistance of Emilie Cornelis in the London office of Latham & Watkins.
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