Sustainability oriented investors reacted with delight when, in October of 2015, the World Federation of Exchanges (WFE) issued guidance on sustainability reporting requirements for companies listed on its member exchanges. With consensus emerging among investors that a company's non-financial or so-called "sustainability" performance is indicative of its overall financial health, attention has turned to ways to make the form and substance of sustainability disclosures more consistent.
The WFE's new sustainability reporting guidelines are a powerful acknowledgement of just how seriously markets are taking investor demands.
While stunning in scope, the announcement by the WFE is not unexpected. Many of the world's largest institutional investors, such as CalPERS, have been agitating for a more consistent approach to ESG disclosure for years. In fact, James Andrus, an Investment Manager at CalPERS, went on record in 2015 that “going forward, all else being equal, if two managers come to CalPERS, one with ESG capacity and one without, we go with the former." When it comes to the WFE's announcement, then, it can be seen as another not-so-subtle suggestion that companies build ESG capacity quickly.
CalPERS has been seeking higher risk adjusted returns using ESG information.
The upshot of this transitional phase towards full ESG disclosure is that companies already prepared for the new regime may reap temporary advantage as their competitors play catch-up, particularly those with penchant fund investors. But whatever arbitrage may be available, practical challenges around sustainability data collection and reporting threaten the ability of all companies to meet heightened investor expectations. For example, companies in sectors where data is difficult to acquire, like real estate, or where impacts are far flung, like food production, will be strained while standing up and operationalizing entirely new compliance systems and process.
For more on these challenges, take a look at Katie Gilbert's article in Institutional Investor Magazine. It captures take-aways from industry luminaries including Deloitte's Kristen Sullivan, BlackRock's Michelle Edkins, and Nasdaq's Evan Harvey on the impending regime of ESG disclosure, and provides a look at how the new era of radical transparency will affect companies of all sizes.
Read more about collecting, reporting and acting upon non-financial data on Measurabl's blog.