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Race to the Top: Tracking Efforts to Establish a Global ESG Standard

As the global economy stirs from its pandemic slumber, the rise of environmental, social and governance (ESG) investing is quickly becoming not only a focus of business discourse, but also an action item for organizations across sectors. Governments are looking to “build back better” by investing in green infrastructure and emission reduction initiatives, or issuing sustainability bonds – measures that are designed to drive post-COVID economic recovery and growth. Industry is also looking to find its innovative edge and competitive advantage in a lower-carbon economy – announcements from companies committing to net-zero carbon emissions are now a regular occurrence. According to Ecosystem Marketplace, the number of companies making climate-neutral or net-zero pledges has doubled during the COVID-19 pandemic. On the finance side, significant amounts of capital are being directed to investments in renewable energy and clean technologies. A June 2020 report from Goldman Sachs expects that renewable power will become the largest area of spending in the energy industry in 2021, surpassing upstream oil & gas for the first time in history based on their estimates. Goldman Sachs notes that these investments will encompass mostly renewables, biofuels and the infrastructure investments necessary to support electrification initiatives.

One year in, the COVID-19 pandemic has exposed vulnerabilities in the economy as governments and industry manage the impacts of lockdowns and changes in consumer behaviour. The need for more responsive risk management approaches has put a spotlight on ESG as an important factor not only in creating value for organizations, but also enabling them to be more nimble in dealing with risks to business such as climate change. In particular, the pandemic has highlighted the need to quantify and manage these risks. Diversity and inclusion are also being increasingly seen as essential to boosting the value of companies.

As ESG factors play an increasingly important role in assessing credit and market risk, investors are looking for more meaningful information – this highlights the need for consistency in disclosure standards. Part of the challenge for stakeholders is the sheer number of existing frameworks and voluntary standards for ESG reporting, some of which overlap but are not directly comparable. As a result, investors and other stakeholders have been calling for regulators to harmonize and streamline ESG disclosure standards. The launch of several initiatives in 2020 demonstrate the priority that stakeholders have placed on consolidating such disclosure standards. This article provides an overview of ESG and the leading ESG standards, as well as an update on efforts to establish a common global standard for ESG.

ESG – A Primer

The Financial Times Lexicon describes ESG as “a generic term used in capital markets and used by investors to evaluate corporate behaviour and to determine the future financial performance of companies.” ESG criteria are non-financial factors that investors apply as part of their evaluation process to identify material risks and growth opportunities, and to assess the future financial performance of companies. ESG factors are increasingly being taken into account alongside financial factors in the investment decision-making process. The components of the ESG triptych can be described as follows:

  • Environmental criteria consider how a company performs as a steward of nature.
  • Social criteria examine how a company manages relationships with employees, customers, suppliers, and local communities.
  • Governance criteria look at company leadership, executive pay, audits, internal controls, and shareholder rights.

The term “ESG investing” refers to a class of investments that seek positive returns and long-term impacts on society, environment, and the performance of the business. ESG investing is also known as socially responsible investing, sustainable investing, impact investing, values-based investing, or mission-related investing.

While ESG metrics are not commonly part of mandatory financial reporting, companies are increasingly making ESG disclosures in their annual reports or in stand-alone sustainability reports. A number of institutions, such as the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI), are working on standards to facilitate the incorporation of ESG criteria into the investment process. These standards are discussed in further detail below.

Is ESG the same as CSR?

Corporate social responsibility (CSR) has its roots in corporate philanthropy, which can be traced back to the early 20th century. According to the Association of Corporate Citizenship Professionals, CSR began to take hold in the United States in the 1970s, when the concept of the “social contract” between business and society was declared by the Committee for Economic Development in 1971. The social contract flows from the idea that business functions because of public “consent”, therefore business has an obligation to constructively serve the needs of society. This consent is often referred to today as a “license to operate”; CSR marked the starting point for businesses taking ownership of their impact on society. 

While ESG has its origins in CSR, the two concepts can be distinguished from one another. CSR seeks to make a business accountable for its activities, while ESG criteria make its efforts measurable. CSR activities vary greatly between businesses and sectors, so no standard metrics have been developed. Rather, CSR is often just an add-on to a company’s mission and overall business direction. On the other hand, ESG activity is quantifiable to a much greater degree. For example, ESG scores and ratings such as the World’s Most Ethical Companies and the Global 100 have been developed, and targets are set and reported on. Metrics can be applied to how companies treat their employees, manage supply chains, respond to climate change, increase diversity and inclusion, and build community relationships.

Leading ESG Standards

As noted above, there are a number of existing frameworks and voluntary standards for ESG reporting. Before proceeding, it is important to distinguish between sustainability frameworks and sustainability standards, which are complementary to one another: (i) frameworks provide principles-based guidance on how information is structured, how it is prepared, and what broad topics are covered; and (ii) standards provide specific, detailed, and replicable requirements for what should be reported for each topic, including metrics. 

The leading ESG standards include the following:

  • Sustainability Accounting Standards Board (SASB) – SASB Standards identify the subset of environmental, social, and governance issues most relevant to financial performance in each of 77 industries. They are designed to help companies disclose financially material sustainability information to investors.
  • CDP (formerly the Carbon Disclosure Project) – CDP’s global environmental disclosure system enables investors, companies, cities, states and regions to assess and manage risks and opportunities related to climate change, water security and deforestation impacts.
  • Climate Disclosure Standards Board (CDSB) – The CDSB Framework sets out an approach for reporting environmental and climate change information in mainstream reports, such as annual reports, 10-K filings, or integrated reports.
  • Global Reporting Initiative (GRI) – The GRI Standards represent global best practice for reporting publicly on a range of economic, environmental and social impacts.
  • Task Force on Climate-related Financial Disclosures (TCFD) – The TCFD recommendations on climate-related financial disclosures are designed to solicit decision-useful, forward-looking information that can be included in mainstream financial filings. They are designed to be widely adoptable and applicable to organizations across sectors and jurisdictions. The recommendations are structured around four thematic areas that represent core elements of how organizations operate: (i) governance; (ii) strategy; (iii) risk management; and (iv) metrics and targets.
  • International Integrated Reporting Council (IIRC) – The International Integrated Reporting Framework(January 2021) is aimed at accelerating the adoption of integrated reporting for the purpose of improving the quality of information available to providers of financial capital, thus enabling a more efficient and productive allocation of capital.

The Push for a Global ESG Standard

In recent years, a plethora of sustainability reporting initiatives has emerged to meet the evolving information needs of the investment community and to respond to growing expectations around the role of corporate citizens. While companies can use different frameworks and standards as building blocks to develop a system of disclosure tailored to their unique needs and circumstances, this poses challenges to investors and other stakeholders looking for consistent and comparable disclosure to make investment decisions. The establishment of a globally accepted ESG standard would enable investors to assess and compare inter-company sustainability reporting in a more meaningful and efficient way. New initiatives in 2020 from the World Economic Forum and IFRS Foundation, among others, came in response to calls from investors, insurers, banks and lenders for a universally accepted ESG reporting standard.

Notable initiatives currently underway include:

  • World Economic Forum/International Business Council’s (IBC) Stakeholder Capitalism Metrics – In August 2019, the IBC initiated a project with Deloitte, EY, KPMG and PwC to identify a set of universal metrics and disclosures for reporting on ESG performance – these are referred to as the Stakeholder Capitalism Metrics. In September 2020, the project published a set of 21 core and 34 expanded metrics and disclosures in its report, Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation. The paper builds on the document released by the World Economic Forum in January 2020, entitled “Toward Common Metrics and Consistent Reporting of Sustainable Value Creation”, and encourages companies to report against as many of the core and expanded metrics as they find material and appropriate, on the basis of a “disclose or explain” approach. The 21 core metrics and disclosures are primarily quantitative metrics for which information is already being reported by many firms (albeit often in different formats) or can be obtained with reasonable effort. They focus primarily on activities within an organization’s own boundaries. Examples include anti-corruption measures, greenhouse gas emissions, pay equality, and research and development expenses. The 34 expanded metrics and disclosures tend to be less well-established in existing practice and standards, and have a wider value chain scope or convey impact in a more sophisticated or tangible way, such as in monetary terms. They represent a more advanced way of measuring and communicating sustainable value creation. Examples include Paris-aligned greenhouse gas emissions targets, employee well-being, social value generated, and total tax paid for significant locations. The recommended metrics are drawn from existing standards and are organized under four pillars that are aligned with the UN Sustainable Development Goals and principal ESG domains: Principles of Governance, Planet, People and Prosperity. On January 26, 2021, a coalition of over 60 top business leaders across industries announced their commitment to the Stakeholder Capitalism Metrics.
  • Impact Management Project – In September 2020, the five leading voluntary framework and standard-setters – CDP, CDSB, IIRC, GRI and SASB – signed a Statement of Intent to collaborate on comprehensive corporate reporting and engage with key actors in this area. The pledge highlights research that shows a correlation between sustainability performance and the drivers of enterprise-value creation. By working together and engaging with key actors (including the IBC, International Organization of Securities Commissions (IOSCO), International Financial Reporting Standards Foundation (IFRS), and European Commission), the group aims to develop a comprehensive reporting system that meets the needs of a variety of users.
  • IFRS Consultation Paper on Sustainability Reporting – In October 2020, the International Financial Reporting Standards Foundation (IFRS Foundation) launched a consultation process to assess demand for global ESG standards. The IFRS Foundation established the IFRS Standards, which are financial reporting standards that are required for use in more than 140 jurisdictions. The consultation recognizes the use of sustainability reporting in value creation and risk mitigation, and that a set of comparable and reliable standards will allow businesses more transparency and greater assurance. In the consultation paper, the IFRS Foundation indicated its wish to establish a Sustainability Standards Board, which would operate as a new standard-setter alongside the existing International Accounting Standards Board (which sets the IFRS standards). The consultation period closed on December 31, 2020 and the IFRS received feedback and support from more than 450 stakeholder groups, including institutional investors, pension funds and regulators.
  • International Organization of Securities Commissions (IOSCO) – In April 2020, IOSCO released a report, Sustainable Finance and the Role of Securities Regulators and IOSCO, which provides a detailed analysis of current ESG-related initiatives, identifies a number of areas where improvements can be made, and articulates the need for IOSCO to play a key role in this area. IOSCO sees an urgent need to improve the consistency, comparability, and reliability of sustainability reporting, with an initial focus on climate change-related risks and opportunities; this would subsequently be broadened to other sustainability issues. In December 2020, IOSCO announced its support for the establishment of a Sustainability Standards Board under the IFRS Foundation.
  • US Securities and Exchange Commission (SEC) – In May 2020, the SEC’s Investor Advisory Committee recommended that the SEC begin an effort to update the reporting requirements of issuers to include material, decision-useful, ESG factors. To begin this process, it was suggested that the SEC could undertake a series of outreach efforts to investors, issuers and other market participants which could include roundtables and other actions on this topic. The feedback received from consultations would help SEC staff to review and evaluate multiple options or approaches to updating the reporting requirements regarding material ESG issues. Also, the SEC’s Asset Management Advisory Committee put ESG at the top of its agenda for its May 2020 meeting and formed the ESG Subcommittee to give the SEC a range of perspectives on issues of significance in the asset management world. In December 2020, the ESG Subcommittee published proposed recommendations regarding issuer disclosure of ESG risks. On February 24, 2021, the SEC announced that it will enhance its focus on climate-related disclosure in public company filings. As part of its enhanced focus in this area, SEC staff will review the extent to which public companies address the topics identified in the 2010 SEC guidance on climate disclosure, assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb lessons on how the market is currently managing climate-related risks. 
  • Chartered Financial Analysts Institute (CFA Institute) – In August 2020, the CFA Institute released a consultation paper to support the establishment of a standard for describing and understanding ESG financial products on the market. The consultation paper notes the concern of several market participants with respect to consistency and variation in the use of ESG terms. In response to this issue, the CFA Institute will issue a voluntary, global industry standard to provide greater product transparency and comparability for investors by enabling asset managers to clearly communicate the ESG-related features of their investment products. This standard is expected to be released in May 2021.
  • International Association of Insurance Supervisors (IAIS) – In October 2020, IAIS issued a consultation paper on the supervision of climate-related risks in the insurance sector. The paper aims to provide examples of good practices and guidance on assisting implementation, but it does not seek to establish new standards. The following topics and Insurance Core Principles (ICPs) are within the scope of the paper: (i) Supervisory Review and Reporting (ICP 9); (ii) Corporate Governance (ICP 7); (iii) Risk Management (ICP 8 and 16); (iv) Investments (ICP 15); and (v) Disclosures (ICP 20).


In addition to the foregoing, the European Union’s (EU) Non-Financial Reporting Directive 2014/95/EU requires public interest companies in EU Member states with more than 500 employees to disclose certain types of non-financial and diversity information in their yearly management reports. The directive covers approximately 6,000 large companies and groups across the EU, including listed companies, banks, insurance companies, and other companies designated by national authorities as public interest entities. Companies are required to include non-financial statements in their annual reports from 2018 onwards. The Directive is part of an overall strategy to encourage corporate social responsibility in the EU. It also aims to encourage transparency and accountability by requiring companies to produce corporate responsibility disclosures at regular intervals, and to outline their specific policies on them. The Directive is currently under review by the European Commission with a view to strengthening it by establishing standards that will be mandated for external reporting.

The State of ESG in Canada

Recent research indicates that Canadian boards are due for an overhaul of their governance standards in order to adapt to shifting cultural norms and effectively address a growing list of inter-generational risks, such as climate change and income inequality. In a report on the state of governance in Canada entitled “Where are the directors in a world in crisis?”, authors Sarah Kaplan and Peter Dey argue that “Canada must upgrade its governance standards or risk being left behind”. The report sets out 13 guidelines which emphasize the need for a corporate purpose, a greater understanding of stakeholder matters, board and organizational diversity, realigned executive compensation, and active policies on the environment and Indigenous rights. The report goes on to note that although Canada is not leading the way on governance reforms, it has much of the legal infrastructure for reform in place because of the 2008 Supreme Court of Canada (SCC) decision in  BCE Inc. v. 1976 Debentureholders, where the SCC affirmed that boards of directors have a duty to act with a view to the best long-term interests of the corporation, and by corollary, do not have a duty to act only in the best interests of any particular stakeholder group (i.e. shareholders). This decision (along with the 2004 SCC decision in Peoples Department Stores Inc. (Trustee of) v. Wise) marked a legal shift from shareholder primacy to stakeholder primacy.

While the ESG momentum in Canada has been slower to build, there have been several recent notable developments on the ESG front:

  • In January 2021, Ontario’s Capital Markets Modernization Taskforce (the Taskforce) published its final report setting out 74 policy recommendations, which are intended to modernize Ontario’s capital markets. The final report contains recommendations on improving regulatory structure to enhance governance and improving competitiveness through regulatory measures, among others. On ESG, the Taskforce recommends mandating disclosure of material ESG information, specifically climate change-related disclosure that is compliant with the TCFD recommendations for issuers through regulatory filing requirements of the Ontario Securities Commission. The key elements of the proposed ESG disclosure requirements are as follows:
    • The requirements would apply to all reporting issuers (non-investment fund).
    • The requirements would include (i) mandatory disclosure recommended by the TCFD related to governance, strategy and risk management (subject to materiality), excluding mandatory disclosure of scenario analysis under an issuer’s strategy; and (ii) disclosure of Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas emissions on a “comply-or-explain” basis.

There would be a transition phase for all issuers to comply with the new disclosure requirements, beginning when the new requirements are implemented. The length of each issuer’s transition phase would depend on the issuer’s market cap at the time the requirements are implemented, with each issuer grouped into one of three market cap tiers that correspond to a certain transition phase: (i) large cap issuers (greater than $500 million) – transition phase of 2 years; (ii) medium cap issuers (between $150 million and $500 million) – transition phase of 3 years; and (iii) small cap issuers (less than $150 million) – transition phase of 5 years.

The Taskforce also encourages the CSA to proceed in alignment with Ontario and implement similar disclosure requirements across Canada.

  • On November 25, 2020 the CEOs of eight leading Canadian pension plan investment managers (AIMCo, BCI, Caisse de depot et placement du Québec, CPP Investments, HOOPP, OMERS, Ontario Teachers’ Pension Plan, and PSP Investments), issued a joint statement calling on companies and investors to provide “consistent and complete” ESG information in order to “strengthen investment decision-making and better assess and manage their collective ESG risk exposures”. The group represents approximately $1.6 trillion of assets under management. In their joint statement, the CEOs made the following request: “We ask that companies measure and disclose their performance on material, industry-relevant ESG factors by leveraging the Sustainability Accounting Standards Board (SASB) standards and the Task Force on Climate-related Financial Disclosures (TCFD) framework to further standardize ESG-related reporting. While the SASB standards focus broadly on industry-relevant sustainability reporting, the TCFD framework calls for climate-specific disclosures across several reporting pillars (governance, strategy, risk, and metrics and targets). Both are useful to investors and informative to companies working to frame their ESG reporting.”
  • On November 12, 2020, Institutional Shareholder Services (ISS) announced its proxy voting guidelines updates for TSX-listed companies for shareholder meetings taking place on or after February 1, 2021 (2021 ISS Guidelines). Under the 2021 ISS Guidelines, ISS has added “demonstrably poor risk oversight of environmental and social issues, including climate change” to its list of examples of failure of risk oversight. Prior to the 2021 ISS Guidelines, examples of failure of risk oversight included only bribery, large or serial fines or sanctions from regulatory bodies, significant adverse legal judgments or settlement, or hedging of company stock. ISS generally recommends voting against or withholding votes from individual directors, committees or the entire board, under extraordinary circumstances, where there has been “material failures of governance, stewardship, risk oversight, or fiduciary responsibilities at the company”, among other things.
  • In November 2020, the Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) announced plans for a pilot project to use climate change scenarios to better understand the risks to the financial system related to a transition to a low-carbon economy. Scenario analysis has emerged as a useful tool for identifying potential risks in uncertain environments. Climate-change scenarios related to a transition to a low-carbon economy explore different pathways for emissions reductions (driven by changes in policy, technology, and consumer and investor preferences) and their implications for the economy and financial system. The Bank of Canada and OSFI are looking to build on previous workon climate-change scenarios for the global economy and develop a set of climate-change scenarios that are relevant for Canada. The objective is for participants to be able to explore the potential risk exposures of their balance sheets with these scenarios. The Bank of Canada and OSFI are aiming to publish a report by the end of 2021, with details on the specific scenarios, methodology, assumptions and key sensitivities.
  • In June 2019, Canada’s Expert Panel on Sustainable Finance (the Panel) delivered its final report, Mobilizing Finance for Sustainable Growth, which set out a series of recommendations focused on the essential market activities, behaviours and structures needed to bring sustainable finance into the mainstream. The Panel noted that “TCFD is in many respects a private sector framework to uniformly assess risk and opportunity. While not in the Panel’s remit, consultations suggest that, over time, Canadian companies should use the framework to consider broader sustainability issues.” The Panel acknowledged that there are barriers to immediate widespread adoption of the TCFD Recommendations, including: compliance timeframes; lack of data and expertise for proper risk assessment and scenario planning; cost and capacity of smaller issuers to adopt; lack of knowledge support in the professional ecosystem; and legal risk associated with reporting forward looking information, especially in mainstream financial reports. The Panel put forward three recommendations to address TCFD implementation: (i) endorsing a phased ‘comply-or-explain’ approach to adoption of the TCFD framework in Canada; (ii) providing clarity to issuers on the recommended scope and pace of TCFD implementation; and (iii) working with federal, provincial and industry partners to clarify the materiality of climate-related financial disclosures.

Also, in its fall 2020 economic statement, the federal government committed $7.3 million over three years for the Department of Finance Canada and Environment and Climate Change Canada to create a public-private Sustainable Finance Action Council (the Council) that will make recommendations on market infrastructure needed to attract and scale sustainable finance in Canada, including enhancing climate disclosures, ensuring access to useful data on sustainability and climate risks, and developing standards for investments to be identified as sustainable. The Expert Panel on Sustainable Finance had advised the federal government to establish the Council to help implement its recommendations. The federal government is expected to launch the Council in early 2021.

The Road Ahead

Until now, the presence of different sustainability frameworks and standards has resulted in disparate reporting metrics, confusion about reporting requirements, and a lack of meaningful information for investors. As discussed above, this state of affairs has led to increasing calls from stakeholders to harmonize the various frameworks and standards.

Challenges lie ahead in establishing a global ESG standard. For example, reaching a consensus on the definition of materiality may face hurdles. Materiality can be defined within the context of societal value or in relation to investors’ interests. The concept of “double materiality” may represent a potential compromise. The notion of double materiality was first introduced by the EU Commission as part of the Non-Binding Guidelines on Non-Financial Reporting Update (NFRD), and speaks to the fact that risks and opportunities can be material from both a financial and non-financial perspective. In other words, issues or information that are material to environmental and social objectives can have financial consequences over time. The GRI’s definition of materiality also incorporates these dual aspects, i.e. GRI’s G4 Sustainability Reporting Guidelines describe materiality as the threshold at which relevant topics that may reasonably be considered important for reflecting an organization’s economic, environmental and social impacts, or influencing the decisions of stakeholders, become sufficiently important that they should be reported. Also, the risk of greenwashing may undermine stakeholders’ ability to rely on ESG data and disclosure. In particular, misleading disclosures or inaccurate product labelling could impact the credibility of claims designed to advance ESG objectives. Despite these challenges, the recent proliferation of ESG initiatives demonstrates a level of stakeholder commitment to developing a global ESG standard. It is also a recognition of the relationship between value creation and ESG disclosure.

The United Nations’ next climate conference, COP26, is scheduled is scheduled to take place in Glasgow in November 2021. It will be accompanied by the COP26 Private Finance Agenda, a global initiative launched in February 2020 by Mark Carney, currently the UN Special Envoy for Climate Action and Finance. The goal of the Agenda is for every professional financial decision to take climate change into account, by incorporating climate risk management and creating a pathway toward net-zero greenhouse gas emissions by 2050. The Responsible Investment Association is the convening organization for the initiative in Canada, which will coordinate with other organizations around the world. In the lead-up to COP26, we can expect to see a flurry of major climate initiatives from investors and financial institutions.

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