Beyond the Façade: Sustainability is About to Get Real
In our years working with capital markets around the globe, we learned that money managers would confront various hurdles in ESG and Sustainability, especially as companies increasingly reveal their risks and opportunities in a more transparent and comprehensive way.
The companies reporting would also face challenges in understanding how their disclosures measure up against those of their industry counterparts and in identifying overlooked gaps in their strategies and potential opportunities.
With the enactment of mandatory disclosures for public companies across numerous global markets, and as these disclosures spread throughout supply chains, we expect to witness unparalleled transparency and comparability in ESG and Sustainability disclosures.
The Emperor’s New Clothes
Along with this deluge of information, it will be vital for investors to filter out the noise and detect, perhaps for the first time, the extent of businesses' vulnerability to climate-related and sustainability risks worldwide. The comparability of this information should also uncover companies that created falsehoods, like in the story, The Emperor's New Clothes.
To move beyond the redundant details prevalent in current disclosures and to unearth the substance crucial for decision-making, investors will have to adeptly assess a multitude of reports filled with both quantitative and qualitative content. This necessity arises from the adoption of the ISSB (International Sustainability Standards Board) standards, IFRS S1 and IFRS S2, by various countries. These standards mandate core content encompassing Governance, Strategy, Risk Management, and Metrics and Targets, which together describe an entity's handling and performance concerning sustainability-related and climate-related risks and opportunities.
Isolating What’s Important
By isolating the critical decision-making information, stakeholders can evaluate the relevance, completeness, clarity, consistency, comparability, reliability, and timeliness of the data. They can also gauge stakeholder engagement and decide whether to trust the company's reports or if further assurance is warranted.
As we approach the starting line for mandated ESG and Sustainability disclosures, the true ingenuity will lie in leveraging this information to channel capital towards fostering more sustainable business models and, ultimately, a more sustainable world.
SME Personalization
Embracing this process will uncover operational efficiencies, open new markets, and enhance brand reputation. SMEs should consider personalizing their sustainability narratives and integrate ESG principles into their core business strategies as quickly as possible. As we edge closer to universal ESG mandates, SMEs that anticipate and act on these shifts can expect to thrive.
