Lauren Smart, Chief Commercial Officer, S&P Global Sustainable1
Environmental, social and governance issues have moved to centre stage as stakeholders demand more transparency on corporate sustainability plans
Environmental, social and governance (ESG) issues have been gaining a high level of attention as it has become clear that these factors can affect a business’s financial viability. Corporate profitability may be impacted by fires, floods and other physical risks; by increasing carbon pricing policy, unacceptable labour and human rights practices; and by conflicts of interest or scandals resulting from poor business management. The rising prominence of ESG issues and the increasing market demand for greater insight are reshaping requirements for disclosure and analytics. Customers, investors and other stakeholders are demanding to know more about a company’s ESG track record, while companies are looking to dig deeper into their strengths and weaknesses to take meaningful action.
Increasing regulations help move the dial
In recent years, the financial sector has seen a large number of regulatory developments around sustainable finance, encouraging banks, insurers and others to be more proactive and transparent in their efforts to support the transition to sustainable business models. The EU Sustainable Finance Disclosure Regulation (SFDR), for example, is imposing more stringent requirements on disclosures made by financial services institutions with regard to sustainability risks. At the same time, SFDR is trying to help companies better understand the type of information that should be collected and reported to create more consistent and comparable measures for the most important ESG elements.
Additional insight into ESG factors will help support portfolio optimisation and capital allocation towards companies with superior ESG performance. Companies with poor performance, or little information available about their ESG stance, will be at a disadvantage. This is especially the case with investor interest in ESG surging, fuelled in part by strong performance signals from some of the biggest funds set up with ESG criteria. In addition, the size of the overall ESG debt market nearly doubled to $608.8 billion in 2020, while sustainability bonds, a hybrid of green and social debt, tripled.
Access to extensive data is essential
Companies can demonstrate their dedication to the highest standards of ESG insight and action planning by directly reporting key sustainability metrics and benchmarking their relative performance on a wide range of industry-specific issues. Disclosure can be challenging, however, especially as more and more data is being requested as ESG continues to evolve as a field of interest.
S&P Global Sustainable1 is committed to enhancing ESG intelligence for the global marketplace and, over the years, has collected, validated and standardised an enormous amount of data relating to climate change, natural resource constraints and broader ESG factors. This includes the S&P Global Corporate Sustainability Assessment (CSA), an annual survey-based evaluation of companies’ sustainability practices first established in 1999, which generates company-level ESG scores. This provides detailed ESG benchmarking insights for participants to better integrate sustainability and business strategy. The S&P Global Sustainable1 offering also includes extensive environmental data for more than 15,000 companies, representing 98 per cent of global market capitalisation, which can be used to assess environmental costs, identify and manage environmental risk and conduct peer and portfolio analysis from an environmental perspective. Importantly, S&P Global Sustainable1 also has a well-tested approach in place to fill gaps when information is not disclosed and fix any errors that may occur to help complete the picture across financial portfolios and corporate supply chains.
Progress is being made
Fortunately, there are strong signs that more companies are assessing their current ESG position and developing strategies for improvement. Net zero and carbon neutral commitments have been on the rise in 2021, as companies, financial institutions and countries assert their alignment to global climate goals. In addition, the S&P Global CSA saw the strongest level of corporate participation in 2020 − up 19 per cent from 2019, with an additional 238 companies participating for the first time and generating ESG scores. It seems that disclosure is no longer simply a ‘nice to have’ but, rather, a necessity for companies to inform strategic innovation and attract important investment dollars.
As reporting continues to evolve and become more standardised across companies and countries, it is expected that ESG practices will become a natural part of ongoing assessments of business performance, as traditional financial analysis is today.
For more information on S&P Global Sustainable1, visit spglobal.com/sustainable1