Social and environmental non disclosure and ESG Flashcards
(23 cards)
What does a non-financial disclosure portray?
the relationship between a corporation and society. They seek to improve communications between the corporate world and broader society within which companies reports.
Reports have many names: CSR reports, ESG reports, sustainability reports, community affair reports etc.
What issues are addressed in non-financial reporting?
- CO2 net zero
- circular economy
- modern slavery
- labour rights
- landfill
Who engages in non-financial reporting?
- 95% of the worlds 250 largest companies report on social and environmental issues and of these just under 50% are independently assured e.g. big 4 accounting firms
- according to the corporate register just under 21,000 organisations globally have submitted a total of 135,876 reportd.
- UK modern slavery act 2015 applies to all firms with a turnover of more than £36 million
- In the UK publicly listed companies must report by law and certain issues such as greenhouse gas emissions.
- ESG investors demand for better and improved data and transparency has resulted in most firms seeking investment implicitly are subjected to non-financial reporting
What make for good non-financial disclosure?
- Lydenberg et al 2015 identified a set of practical ways to assess the quality of information provided in non-financial disclosure:
Does report address what policy the firms adopted and what firm is doing to make the policy practice?
Is there evidence of data that captures what firm is trying to do?
Can you compare data across years?
Can you identify what future direction the company wants to take on issues that it highlights?
Does the report the good and bad?
Does the report address the biggest challenges the firms facrs?
Are financial implications of the social and environmental issue addressed and if so what are they?
What is materiality?
The notion of materially is the cornerstone for financial reporting - ‘determines the importance of an item for information users’ - anything deemed material should be included.
What is the threshold for material issue?
it is initially set by management, auditors them make an independent assessment of whether the material presented represents a ‘true and fair’ view of the firm.
ESG investors likely to have a lower materiality threshold than management, but precise meaning of true and fair terms are fuzzy.
What can be some changes in materiality?
changes means issues such as water and energy use, fair trade, workplace conditions, many now be deemed material issues, so there is a argument for including these in the CSR reports
What is the international auditing practice statement?
Extended materiality to social and environmental issues - saliences to stakeholders should be disclosed where they have a material, financial impact on the financial statements.
Because these issues are less straightforward to assess, including them with a low threshold for materiality purpose means they can easily be accounted for.
Increasing expectation is that assurance should see ESG reporting and fundamental reporting as a whole and pass judgement on the entire picture of the business that emerges and overcomes historic myopia. ESG investors have been a key driver in what constitutes materiality.
What is legally mandated disclosure?
is enforceable by law and non compliance may result in a penalty or other forms of punishment e.g. UK MSA
How has the EU adopted legally mandated disclosure?
Has adopted corporate sustainability reporting directive (CSRD) which stipulates disclosure of broader issues across the domain of social and environmental issues such as gender diversity in firms management environment dimensions. Punishment for non-compliance is unclear and national requirements are not subsumed.
How has India adopted legally mandated disclosure?
Legislation forcing firms of certain value to invest 2% of profit e.g. eradicating poverty, reporting aligns with those objectives
What is voluntary disclosure?
‘Has fewer restrictions - it may encourage firms to take their societal and environmental responsibility more seriously, CSR reports as credible signals ESG markets signals.
Critics argue that is is innated in scope, used as a tool to signal legitimacy, unreliable at which provides little comprehensive insight.
Hypocrisy organisation don’t walk their own sustainability talk, so reports are les reliable.
What is hypocrisy?
modern organisations are particularly apt to pretend they can satisfy a series of conflicting demands (Brunsson 2007)
What to competing stakeholder demands mean?
mean signally to a multifaced audience. Organisation respond by setting up sub structures to respond e.g. investors relations department, sustainability office or charitable foundation.
Contributes to creating different facades designed to keep varying stakeholder groups happy e.g. fast fashion company saying they make sure that they follow law in UK but those individuals in third world countries maybe subjected to child labour.
What is ESG investment?
seeks to explicitly account for the social, environmental and governance parameters of target firms.
In other words, ESG investors seek to invest in firms that take their social, environmental and governance responsibility seriously.
Integrating ESG considerations in this way is defined as the explicit inclusion by asset managers of ESG risks and opportunities into traditional financial analysis and investment decisions based on systematic process and appropriate research source.
What does the UN Principles of Responsibility Investment (PRI) require?
requires asset managers who sign up for the principles to adhered to 6 principles.
What do asset managers do?
Take money from individual and intuitional customers e.g. pensions fund and invest their money into a range of companies.
If you have a stock and share ISA, chances are asset manager are involved.
What are the two types of investment practices that asset managers do?
- Actively Managed funds (involved in decision making)
- Passively managed funds (decision making based on algorithm)
Asset managers must assess the likelihood the firm will make a profit and a return to investors, but also the degree to which social, governance and environmental practices at the firm align with PRI and customer objectives.
What are the stats for asset management?
in 2015 nearly $60 trillion was under management under the PRI principles.
20% of all USD funds under professional management in 2017 were managed on a ESG basis.
Over 1600 investors have signed up to PRI
Only 19% of professionals had received formal training in how to account for ESG criteria in their investment decision.
Fewer than 1 in 4 assets managers said in a survey in 2015 that they frequently included extra finance in their analysis.
Why has ESG investment increased?
- Changes in governance and guidance
- Growth in scholarly evidence showing a positive relationship between ESG investment and firm financial performance.
- Investment industry set up sustainability accounting standard boards (SASB) and international integrated reporting council (IIRC)
- Changes in perception of fiduciary motivation
- Regional differences in motivation
What are legislative changes in ESG?
US department of labour (2015) ruled that ESG considerations could be taken into account in pension management.
- environmental, social and governance issues may have a direct relationship to the economic value of the plan’s investment.
What does the new legislation mean for analysis?
issues are proper components of the fiduciary primary analysis of the economic merits of competing investment choices.
Gave investment professionals who managed pensions explicit permission to account for ESG performance in investment targets.
What are advantages of ESG performance?
- Meta study including 200 studies found that there was a clear performance advantage to investments that were strong on ESG (Clark 2015)
- Evidence that including ESG screening criteria in investment decisions added 16% in annual performance (Verheyden 2016)
- study of ESG-CED link across 2200 studies, 90% of studies found a non-negative relationship meaning ESG pays (Friede, 2015)
- A preliminary ESG screening can make sense for any investment strategy even when there is no specific goal to address sustainability (Verheyden 2016)
- ESG is part of the equation of addressing climate change and social injustice
