The critical role of audit in ESG [ESG for the CFO]
This is our weekly newsletter we deliver to educate our readers on ESG. We aim to curate content on responsible investment to educate and surface relevant news articles, academic papers, best practice reporting guides and latest industry developments. We have a strong ESG community and if you have feedback to share reply to this email to let us know what’s on your mind!
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Issue #91: A weekly update on responsible investment.
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\\ Weekly Insights \\
Strong ESG disclosure goes hand and hand with trust. Over the course of this newsletter and the work we do at Nossa Data we frequently hear about the need for a company’s ESG data to be assured. Given the constant commentary on ESG becoming mainstream, I was happy to see a post from CFO Dive diving (;P) into the subject.
Who looks at ESG information? Well — the list keeps growing but regulators, investors, rating agencies, non-profit groups and customers have all expressed serious interest.
What does good ESG data look like? It is consistent, accurate and comparable.
Why worry about assurance?
- Regulation based ESG frameworks is coming but it will take many more years before it is fully developed. Companies cannot wait around for the regulation, they need to start reporting now. Given that 90% of S&P companies published some kind of ESG report, it is important to make sure that data is credible and reliable or a company could be putting themselves at serious risk.
- Third-party assurance can help provide confidence in terms of the quality of ESG information a company puts out on the market and enhance credibility.
- ESG is moving in a similar direction to that of financial disclosures (auditors main expertise). They can apply the same processes to the evolving ESG landscape to professionalise it for everyone.
In the article they explain:
“Increasing corporate transparency around climate change and other ESG issues — and providing independent assurance on those disclosures — has the potential to positively impact companies, regulators, capital markets, and the communities and stakeholders they serve.”
Given that we also saw the Wall Street Journal article say this week
“[ESG] could be the biggest potential expansion in corporate disclosure since the creation of the Depression-era rules over financial disclosures that underpin modern corporate statements.” we recommend companies continue to double down in ESG ASAP.
The Wall Street Journal compared ESG rankings. What did they find?
- Of a universe of 13,000 companies, 1,469 were rated by Refinitiv, MSCI and Sustainalytics.
- They created a ‘common’ scoring language to compare the rankings across the companies.
- 527 of the 1469 (36%) received comparable rankings across the 3 organisations.
- 487 of the 1469 (33%) received disagreeing scores across the 3 organisations.
- 455 of the 1469 (31%) received an opposite rating across the 3 organisations.
What does this mean for companies? For 64% of you, 3 of the largest rating agencies are judging your corporate disclosures differently. Focus on speaking to your investors and understand which rating agencies they pay the closest attention too. Also, focus on learning about how specific rating agencies are working. (Btw, Nossa Data’s technology can help with this, email me at julianne@nossadata.com to discuss.)
Coming back on September 6th: Our automatic OOO replies have gotten out of hand so this newsletter is taking a two week break and will be coming back on September 6th. Don’t worry, that means we get multiple weeks to stack up on the great ESG content and we hope our subscribers try to enjoy the end of August sun!
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We are proud to have Techstars as one of our investors! I’m the Techstars CEO: Here’s why focusing on ESG drives wealth
A company needs to build in ESG (Environmental, Social, and Governance) values from the ground up. The future of business is going to be dominated by companies that see the coming changes and include them into their business models.
“This is why Techstars recently became a signatory to the United Nations-backed Principles for Responsible Investment (UN PRI), because as investors, we understand that building in ESG is simply good business. The entire global economy is being rebuilt. Climate change is rapidly reshaping the physical world while technologies like artificial intelligence and automation are repatterning the digital one. And this means that old solutions won’t work. We are on the cusp of an extinction-level event in the business world, as old corporations hit new market forces and fail to adapt, while new companies with ESG deep in their business models are poised to become the next decade’s giants.”
An ESG iceberg
Thanks subscribers for the recommendations on ESG and Technology! As discussed in last week’s email, here is a great piece on “How CIOs can drive the ESG agenda in their organisation.”
\\ Top Stories \\
ESG Keywords on the Rise in Corporate Transcripts
In June of this year, there were 1,200 transcripts with mentions of ESG during conference calls — the largest number on record. This was a 216.6 percent increase on same month in 2020, when ESG appeared in 379 transcripts. ‘Sustainability’ is a word that has been tracked since 2002 but reached its highest level of mentions in June 2020, when the word appeared more than 1,400 times in transcripts.
The use of the word ‘emissions’ has also seen a sharp increase in recent years. Between 2002 and 2018, there wasn’t a single month where the word was used more than 200 times in event transcripts. But that has changed notably in recent years, culminating in an all-time high of 830 mentions in transcripts in June 2021.
How much carbon comes from a liter of Coke?
From farm to bottler to supermarket cooler, a liter of Coca-Cola creates 346 grams of carbon dioxide emissions, the company’s data show. That’s less than half the tree-to-toilet 771-gram carbon footprint of a mega roll of Charmin Ultra Soft toilet paper. Math like this is fast becoming obligatory. Investors are increasing pressure on businesses to disclose the emissions of greenhouse gases related to their products and services. Regulators are starting to ask about that, too. This could be the biggest potential expansion in corporate disclosure since the creation of the Depression-era rules over financial disclosures that underpin modern corporate statements.
Wall Street Journal [Pay Wall]
A Social and Environmental Certificate for AI Systems
As more countries realise the potential AI has to offer in terms of economic opportunities, large societal problems have also been lumped under the category of things that can be “solved” using AI. AI systems are not without their flaws. There are many ethical issues to consider when thinking about deploying AI systems into society — particularly environmental impacts. There are many reasons to pay attention to the carbon impact of AI systems, especially as larger and larger models are becoming the norm to achieve state-of-the-art results in the industry.
ClimateAction.Tech
The World May be Better Off Without ESG Investing
How could Phillip Morris’ be included in the Dow Jones Sustainability Index (DJSI) and praised as a company doing well on environmental, social, and governance (ESG) factors when they sell 700 billion cigarettes a year? At the core of the problem is how ESG ratings, offered by ratings firms such as MSCI and Sustainalytics, are computed. Contrary to what many investors think, most ratings don’t have anything to do with actual corporate responsibility as it relates to ESG factors. Instead, what they measure is the degree to which a company’s economic value is at risk due to ESG factors. For example, a company could be a significant source of emissions but still get a decent ESG score, if the ratings firm sees the pollutive behavior as being managed well or as non-threatening to the company’s financial value.
Stanford Social Innovation Review.
This company claims to help the world’s biggest corporations recycle. Activists say it’s greenwashing.
TerraCycle calls itself a “social enterprise Eliminating the Idea of Waste®.” But it might be best understood as the company that will recycle the packaging and products created by large corporations. Specifically, the stuff that you can’t put in your curbside bin. It recycles wrappers for everything from Swedish Fish to Entenmann’s Little Bites, plus a grab bag of other plastic products. A new lawsuit filed against TerraCycle in March 2020 alleges that it and its biggest corporate partners — including Coca-Cola, Procter & Gamble, Late July Snacks, Gerber, L’Oreal, Tom’s of Maine, and Clorox — are not telling the whole truth when they say their packaging is recyclable. It says the recycling programs are not accessible or transparent, and the vast majority of packaging still winds up in the landfill or ocean despite conscious consumers’ best efforts.
Vox.
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\\ Report Highlight \\
Oldies but Goodies
This week, I didn’t notice a ton of new academic papers being published around ESG. However, in light of the Wall Street Journal research on ratings I wanted to re-share one of my favorite academic papers on the topic “Aggregate Confusion: The Divergence of ESG Ratings.” This is a great deep dive into the divergence of environmental, social, and governance (ESG) ratings. Based on data from six prominent rating agencies — namely, KLD (MSCI Stats), Sustainalytics, Vigeo Eiris (Moody’s), RobecoSAM (SP Global), Asset4 (Refinitiv). Download the paper.
A global approach to ESG data and disclosure
Macfarlanes.
IOSCO’s recommendation
- Asset manager practices, policies, procedures and disclosure. Regulators should consider setting regulatory and supervisory expectations for asset managers in respect of: (a) the development and implementation of practices, policies and procedures relating to sustainability-related risks and opportunities; and (b) disclosures related to those risks and opportunities.
- Product disclosure. Regulators should consider clarifying and/or expanding existing regulatory requirements or guidance or, if necessary, creating new regulatory requirements or guidance, to improve product-level disclosure in order to help investors better understand: (a) sustainability-related products; and (b) material sustainability-related risks for all products.
- Supervision and enforcement. Regulators should have supervisory tools to ensure that asset managers and sustainability-related products comply with regulatory requirements and enforcement tools to address any breaches of such requirements.
- Terminology. Regulators should consider encouraging industry participants to develop common sustainable finance-related terms and definitions to ensure consistency throughout the global asset management industry.
- Financial and investor education. Regulators should consider promoting financial and investor education initiatives relating to sustainability, or, where applicable, enhance existing sustainability-related financial and investor education initiatives.
\\ Leading Across ESG \\
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Hi, I want to say thank you for subscribing to Nossa Data’s weekly email on ESG. There is a growing expectation that the same way a company’s financial information should be accessible, so should a company’s ESG or non-financial information.
This is why we spend time every week to shine a light on ESG.
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Thank you for joining us on our ESG journey,
Julianne
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Julianne Sloane
Co-founder of Nossa Data
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