Industry experts call for regulatory intervention to improve quality of corporate disclosures on social-related issues.
Inconsistent, limited corporate disclosures continue to frustrate investors’ efforts to secure decision-useful data on social impact, according to panellists during a webinar hosted by the UK Sustainable Investment and Finance Forum (UKSIF) this week.
“Corporate disclosures to inform impact data are not on par with financial markets data, which has a structured and mandatory disclosure foundation underlying it,” said Davina Berttram, Commercialisation Lead for Impact-related ESG Data and Solutions at data provider Sustainalytics.
“In particular, quantitative impact metrics and corporate targets and ambitions towards social impact are falling short, leading to a lot of data gaps,” she said.
To positively contribute to global social and environmental targets – such as those outlined by the UN Sustainable Development Goals (SDGs) – asset owners are increasingly adopting impact investment strategies. This is increasing demand for credible, comparable and relevant data outlining the effect investors’ capital has on an investee company’s performance.
A recent report by research consultancy firm Cerulli highlighted that 66% of US-based asset owners have hired or plan to hire an asset manager to oversee their impact investing strategy.
Around 50% of global investors said that employee recruitment, development and retention is financially material and will consequently, according to a survey by investment bank Jefferies. Fair wages and labour practices were considered financially material by around 20% and 15% of investors respectively.
Further, 12% of respondents said engagement efforts in 2022 will focus on driving a better internal culture at investee companies, and 4% said they will be engaging with companies on increasing pay and benefits to employees, the report said.
A growing number of countries are mandating sustainability corporate reporting from corporates, although there is some divergence between reporting on the financial risks posed to companies by sustainability-related issues as opposed to also measuring and disclosing the impact companies have on the environment and wider society.
The Task Force for Climate-related Financial Disclosures framework has been mandated in the UK, New Zealand and elsewhere, with the UK further planning to introduce Sustainable Disclosure Requirements (SDRs).
The EU is replacing the Non-Financial Reporting Directive (NFRD) with the Corporate Sustainability Reporting Directive (CSRD), which will apply to a wider scope of European companies.
Identifying the data
Identifying specific, in-depth information detailing the direct or indirect impact of investments on social themes such as employment is proving challenging for asset managers, said Will Pomroy, Head of Impact Engagement, Equities, at Federated Hermes.
“Corporate information on employment tends to be very basic; it may be limited to the number of employees hired in a specific location, for example. They are not speaking to the in-depth social value creation metrics investors want to think about,” Pomroy said.
Over three-quarters of assessed asset owners (78%) said collecting impact data from external asset managers continues to be a challenge, according to a recent report by the Global Impact Investing Network (GIIN).
Policymakers globally need to better align corporate disclosure requirements to standardise the social-related information investee companies are providing, which will have a positive knock-on effect on impact data, panellists noted.
In December 2021, the Impact Taskforce (ITF) called for the Group of Seven (G7) nations to mandate impact accounting to encourage more private capital flows towards the SDGs. Policymakers must lead multilateral efforts to improve transparency of existing disclosures, the report noted, encouraging investors and companies to utilise voluntary impact measurement standards until a mandatory impact accounting framework is introduced.
“Companies are the ones realistically delivering impact and that needs to be reported, whether that be positive or negative – they’re the ones employing people and providing goods and services that exacerbate or solve society’s problems,” said Pomroy.
There is a growing number of solutions to support asset owners and managers assessing the social impact of their investments.
GIIN’s IRIS+ platform aligns with multiple frameworks, generating over 700 metrics covering a variety of impact-related standards, including the SDGs.
In November 2021, the Impact Management Platform was launched to help improve interoperability between existing standards to better consolidate both companies’ and investors’ understanding of best practice in impact management.