Inconsistent or incomplete ESG reporting can leave responsible investors struggling to interpret data and identify genuinely high achievers.Damir Khabirov
Despite its popularity, responsible investing has maintained its complexity, resulting in global calls for more uniformity in environmental, social and governance (ESG) reporting practices.
A recent PwC report highlighted the gaps in the quality of ESG reporting among Canada’s top 150 public companies. One of the main findings is how investors face a dearth of transparency and standardization. While 75 per cent of organizations have a sustainability plan, according to PwC, only 35 per cent disclose a net-zero target and only 30 per cent give a timeframe for that target.
“The lack of material disclosures, targets, metrics, assurance and strategy integration discussions limits trust in ESG reporting,” the report states.
There is no industry standard for how a company or organization is required to report on its ESG actions. That makes it difficult for investors to know who is taking significant steps in this area, says Bill Ladyman, a portfolio manager at iA Private Wealth in Winnipeg. He calls the inconsistent quality of ESG data “the greatest challenge…in incorporating ESG in our portfolio models.”
“We currently see poor consistency in the reporting of ESG information from companies, and inconsistent approaches to the analysis of the data in equity analysis,” Mr. Ladyman says. “This in turn leads to the risk of greenwashing, which is the provision of misleading information or narratives regarding a company’s efforts in the ESG arena.”
Stricter standards may be on the horizon. The International Sustainability Standards Board (ISSB) was established in November, 2021 to set a comprehensive and globally recognized baseline of sustainability disclosures for the capital markets. The hope is that investors and others in the industry can clearly compare and contrast companies based on these metrics. New standards may emerge by the end of this year.
In the meantime what are investors who want to seek out responsible companies to do?
Francine Dick, a financial planner and mutual fund dealer at Carte Wealth Management in Mississauga, starts with funds that are run by firms with a solid track record of pouring over ESG reporting.
“You have to be careful and find the right fund, but they’re the ones that will research the companies and comb through the nitty-gritty. That’s a good place to start,” Ms. Dick says.
The need for investors to roll up their sleeves and educate themselves in these standards has never been more “urgent,” says Sara Alvarado, executive director at the Institute for Sustainable Finance (ISF), based at Queen’s University in Kingston.
“Most serious companies are reporting their financials, but also many are producing sustainability reports separately, and some have sustainability risks and opportunities in their annual reports. So I would say if [investors] are looking at analyzing a particular company that would be the first stop, looking at those reports.”
Investors might also find some industry studies helpful, including a 2021 report by the ISF that analyzed the greenhouse gas emissions disclosures, targets and plans of more than 200 of the largest TSX-listed companies.
Ms. Alvarado says the addition of targets to the analysis can give an investor a sense of an organization’s future objectives and whether they are working toward them year-over-year. “As soon as you have targets, the market starts to look at you more seriously,” she says.
An update to the ISFs 2021 report came out earlier this year and stated that 120 out of 231 TSX Index companies (52 per cent) have stated emissions reduction targets, twice the number as the year prior. However, the report found that “Canadian firms still don’t appear to be keeping pace internationally.”
The fact Canadian businesses are failing to keep up with their global counterparts when it comes to ESG reporting could have a significant impact on their bottom lines. Nearly half of the respondents of a 2021 PwC global survey of investors said they’re willing to divest from companies that aren’t taking sufficient action on ESG issues.
The survey analysis concluded that: “Investors, lenders, employees, suppliers and customers can only gravitate to sustainable businesses if they can confidently identify those companies. This means that many top Canadian organizations are at risk of ceding ground to their peers in the global battle for capital, talent and market share.”
Ms. Alvarado says companies are still not tying ESG targets to compensation. That’s a critical gap. “There is nothing better to get these initiatives moving than linking these targets to compensation, because that’s when you really start to get the attention of the decision makers.”
She adds that these are all elements that investors can look for when evaluating a company’s ESG practices. “As soon as they see commitments, you can start distinguishing companies that are taking this very seriously,” Ms. Alvarado says.