The crux of meaningful ESG disclosure: commensurability
For many Canadian issuers, voluntary public disclosure of environmental, social and governance (ESG) factors has, to date, been somewhat of a puzzle given the lack of clear consensus as to the form and substance that such disclosure ought to take. On the investors' end, the challenge quickly became one of commensurability, or simply put, the ability to compare an issuer's ESG performance with another to be able to appropriately price risks and make informed capital-allocation decisions.
Recent developments and initiatives
As previously reported in our forecast for proxy season 2021, eight major Canadian pension funds1 recently joined forces to tackle the "commensurability issue." In a rare joint statement,2 the signatories urge issuers to standardize their practices and ask that, in doing so, they comply with two major complementary reporting frameworks, namely the Sustainability Accounting Standards Board (SASB) standards and the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. This heavyweight endorsement echoes a similar message from BlackRock, the world's largest asset manager, which also expects its portfolio companies to align with both the SASB and TCFD frameworks.3
It is also part of a continuum that noticeably culminated in 2020, with a number of major initiatives towards ESG reporting standardization.
For instance, the World Economic Forum's International Business Council, in collaboration with the "Big Four" accounting firms, made a proposition in late September 2020 for a core set of ESG metrics drawn from existing frameworks.4 A few days before, five significant standard-setting initiatives, namely SASB, the International Integrated Reporting Council (IIRC), the Carbon Disclosure Project, the Climate Disclosure Standards Board and the Global Reporting Initiative, outlined their vision to "work together towards comprehensive corporate reporting."5 This resulted in SASB and IIRC announcing on November 25, 2020, their intention to complete a merger to address the "calls from global investors and corporates to simplify the corporate reporting landscape, providing the market with a clear solution for communicating about the drivers of enterprise value."6
An ever-increasing pressure to get on board
Now that ESG reporting initiatives are aligning and investors' expectations are becoming clearer than ever, the pieces of the puzzle are falling into place. Clearly, investor pleas for robust and comparable ESG disclosure and the pressure on Canadian issuers to adopt standard models in that respect are at an all-time high. Even though, in many respects, the "ESG train" has already left the station, there could hardly be a better time to get on board.
Footnotes
1 The group includes Caisse de dépôt et placement du Québec, Canada Pension Plan Investment Board, Ontario Teachers' Pension Plan, Alberta Investment Management Corp., B.C. Investment Management Corp., Healthcare of Ontario Pension Plan, Ontario Municipal Employees Retirement System and Public Sector Pension Investment Board.
4 https://www.wlrk.com/docs/WEFIBCESGMetricsDiscussionPaperconsultationdraft1.pdf
6 https://www.sasb.org/wp-content/uploads/2020/11/IIRC-SASB-Press-Release-Web-Final.pdf
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