Employees of SunEdison install photovoltaic solar panels on the roof of a Kohl’s Department Store in Westhampton, New Jersey.
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Sustainable investing, once a niche practice, is now a $30 trillion market. With so much capital at stake, investors want quality data on how companies manage environmental, social, and governance (ESG) matters. Few investors think they get it. In a recent survey, investors told us the big problem with sustainability reporting is that the reports are inconsistent and hard to compare.
The roots of this problem run deep. Companies began reporting sustainability information in the 1990s. The main idea was to inform the public of how their activities affected society and the environment. Civil-society groups offered reporting guidelines, along with vocal encouragement.
As more guidelines came out, companies had to choose which ones to follow. Still, informing investors about the financially material risks to the company from sustainability issues, such as the effect of climate change on the company’s assets, remained a secondary purpose.
Today, corporate sustainability reports often omit such financially material information. They vary in their scope and depth. And they seldom undergo independent audits.
Guidelines for sustainability reporting
These peculiarities didn’t trouble the earlier cohort of people who read sustainability reports. But our research suggests that asset owners and asset managers, who increasingly make investment decisions with sustainability in mind, want reporting conventions to change in three main ways.
First, the investors we interviewed told us they want information that’s material to financial performance. The Sustainability Accounting Standards Board has been leading one effort to create sector-specific standards for material sustainability disclosures.
Regulators are paying attention, too. The EU’s 2014 Directive on Nonfinancial Reporting and the Financial Stability Board’s creation of a Task Force on Climate-Related Financial Disclosures are two signals that regulators want companies to report how sustainability-related activities affect their financial standing.
Our survey revealed that investors and companies both want regulation for ESG reporting. Investors told us in interviews that they believe reporting rules would ensure that sustainability data is available every year. Corporate executives said they expect rules to help create a “level playing field.”
Second, investors want sustainability reports to be more uniform. Three-quarters of the investors who responded to our survey said there should be one reporting standard. Greater uniformity, they noted, would streamline their research and help them allocate capital.
The executives we interviewed also indicated that uniform standards would make reporting less of a burden. As it is, many companies devote considerable effort and expense to tabulating the same information, such as greenhouse-gas emissions, in multiple ways so they can fulfill different standards.
Lastly, investors would like sustainability disclosures they can trust. Nearly all the investors we surveyed — 97 percent—said that sustainability disclosures should be audited in some way. Two-thirds said that sustainability audits should be as rigorous as financial audits.
Bringing about these changes will involve years of work by an array of stakeholders. Businesses, civil-society groups, standard-setting organizations, and regulators have begun identifying gaps and redundancies among disclosures. That is a useful endeavour.
So far, though, investors have largely avoided joining standard-setting efforts. They’ll need to get more involved. Those who do take part stand to gain an edge over their more detached peers.
Sara Bernow is a McKinsey partner based in Stockholm. Conor Kehoe is a senior partner emeritus of McKinsey based in London.