Regulators must make new standards for environmental, social and governance simple and avoid regional fragmentation to create transparency and draw in the investment needed to achieve climate change goals, bank chiefs and other standard setters said at Davos.
“Consolidation and simplification [of ESG standards] allows everyone to have a common playing field and common standard and then capital can flow to companies that are delivering profits and purpose,” said Brian Moynihan, chief executive of Bank of America, on a panel at the World Economic Forum in Davos.
The head of Unilever, one of the world's biggest multinational companies, warned there was a risk of over-complicating the process of setting ESG standards.
“We’re at a point of great danger right now. We’re in danger of letting 'perfect' get in the way of ‘good’, of letting complex get in the way of simple, and of letting local get in the way of global,” said Unilever CEO Alan Jope.
A new accounting standard-setting board was launched in November, at the request of G20 countries. IFRS created the International Sustainability Standards Board to address concerns from investors that better quality and more transparent and reliable reporting of ESG issues were needed.
Emmanuel Faber is chair of ISSB and tasked with delivering a global baseline of sustainability-related disclosure standards. Faber said CEOs of all large companies are taking it seriously and the discussion had changed significantly in the last few years, but investors and capital market participants need to know how firms compare.
“What’s absolutely missing is the common language to be able to speak to the providers of their capital – the banks, insurers and investors about it,” Faber said at another panel at Davos.
He said the information should be able to significantly affect the movement of capital and pricing in markets. “That is how companies will be able to attract the capital that they need for the transformation,” he said.
Financiers have estimated that between US$6trn and US$8trn of capital investment will need to be deployed annually to help companies transition and achieve net zero carbon goals.
Creating a common language could accelerate financing flows to speed the energy transition to net zero emissions, according to Tim Mohin, chief sustainability officer of carbon footprint management platform Persefoni, and former chief executive of the Global Reporting Initiative, where he worked on establishing global ESG disclosure standards.
"With regards to the current state of disclosure standards, we've made huge progress in clarifying the alphabet soup, but we're actually also in a bit of a dangerous period. If we speak one global common language for greenhouse gas disclosure around the world, look how much more efficient and effective that will be," he said.
Mohin sees the ISSB as the best vehicle to fulfil the function of a global standard, due to the progress and efficacy of its work so far. "ISSB should 100% be the global standard, their financial standards are already used by 140 countries and the ones that don't use it are using something very close," Mohin said.
"It sets a bar..."
The ISSB's Faber said the standards also need to be pragmatic and proportionate, so they don't burden smaller companies.
That was also a concern for Moynihan. “There’s a danger of different jurisdictions, and there’s an even bigger danger of too much complexity and not being able to understand it,” Moynihan said, adding that standards need to be suitable for a US$300bn company and a US$3m company. “There’s a risk you will overwhelm the smaller companies,” he said.
Moynihan also chairs the WEF's International Business Council, which in 2020 laid out a set of common metrics for companies to follow that 150 firms have signed up to. He said ESG standards should be simple, cover all industries, be voluntary for companies, and be aligned with the UN's sustainable development goals.
“It gives investors, consumers, all the other constituents, the bondholders, a consistent way to see across companies. It sets a bar … and if you’re below that, people shouldn’t invest in you, they shouldn’t lend to you, and they shouldn’t do business with you as a customer,” he said.
The European Union, the US Securities and Exchange Commission, and regulators in the UK, Switzerland, Japan and elsewhere are all keen to set their own standards ranging from ESG taxonomies to reporting requirements. That creates not only the danger of fragmentation, but also excessive compliance.
A senior executive at HSBC earlier this month spoke out about the scale of regulation being forced on banks and asset managers related to ESG. Stuart Kirk, global head of responsible investing in HSBC’s asset management division, complained about the hyperbole that surrounds climate change risks and said the human race has been “fantastic” at adapting to change and climate emergencies.
Kirk said what “bothered” him about the hyperbolic warnings was the amount of regulatory work it was adding to his team at HSBC. “The proportionality is completely out of whack,” he said.
HSBC distanced itself from Kirk's comments, and the Financial Times said he has been suspended pending an internal investigation (see story on previous spread).