Do you still think that ESG is voluntary?

When in 1869 the Committee on Stock List of the New York Stock and Exchange Board introduced mandatory publication of annual financial statements for companies seeking listing, companies’ executives vigorously pushed back defining publicity requirements “arbitrary and unreasonable”. Those who were already listed on the NYSE ignored the new requirement, as it wasn’t included in their listing agreement, but newly listed companies started to publish financial statements.

Nevertheless, reporting was mostly obscure, as companies made critical omissions or failed to disclose valuation methods. Whereas some reports were “emblazoned with gilt on heavy glossy paper” or depicted the companies’ factories in colored pictures, others were mere leaflets on a single folded sheet of paper.

Anyway, reformers fought back corporations’ resistance to transparency, claiming that “Stockholders are entitled to adequate information, and the state and general public have a right to the same privilege”. And they won this battle.

Does this sound familiar?

It should. What has already happened and is happening in the ESG space is following the same transition from moral suasion to mandatory standard. Enviornmental, social and governance (ESG) issues are increasingly taken into account to inform responsible investment decisions.

Signals are not weak:

1. Consider the staggering increase in regulations demanding ESG transparency (there are today 10x the amount than 3 years ago).

2. GRI Guidelines are transitioning to the GRI Sustainability Reporting Standards (GRI Standards). As the Background Document states, “The GRI Standards feature clearer distinctions between requirements (indicated in the text by the word ‘shall’), recommendations (indicated by ‘should’) and guidance (indicated by ‘can’)”. The first public comment period closed this July, while the release of the final Standards is expected for this October, and they should be effective from January 2018.

3. Institutions providing financial accounting guidelines (e.g. FASB, SEC, AICPA, IASB, ICAEW) are broadening the scope of the requirements beyond the financial domain. For example, in some cases, the notes to financial reports now must include a discussion of risk factors, pending lawsuits, large contracts, dependence on large customers, disclosures related to climate change.

4. Companies are starting to include the “Statement of Materiality and Significant Audiences” in their financial reports.

So… do you still think ESG is voluntary?

Author: Donato Calace (LUM University)