There is growing demand for better ESG disclosure across sectors. Voluntary disclosure of information on environmental, social and governance (ESG) issues has been taking place for decades. However, recent years have seen increased stakeholder demand for more consistent, granular, and comprehensive disclosure of information relevant to ESG factors. This has occurred across various industries, including the financial industry. Financial institutions, investors, regulatory authorities and international institutions increasingly recognize that ESG factors can have a potentially significant impact on business value and risk, as well as systemic risk, leading to a heightened focus on ESG disclosure.
There are multiple frameworks and expectations, with more on the way. While a proliferation of reporting frameworks in past decades has stimulated innovation in disclosure practices, the rapid mainstreaming of ESG issues in financial markets creates a pressing imperative for consolidation. The lack of a recognized and uniform framework makes it difficult to achieve comparability. Multiple frameworks can lead to confusion and a risk of greenwashing. Furthermore, the landscape of ESG disclosures by corporates, upon which financial institutions must rely in order to comply with evolving regulatory requirements, is similarly inconsistent and fragmented.
To ensure consistency and comparability across markets and avoid regulatory fragmentation, steps should be taken to develop a harmonized cross-sectoral framework for ESG disclosure across jurisdictions. In the longer term, a durable global solution could be the emergence of a generally accepted international non-financial reporting standard for financial institutions and corporates. Several dimensions need to be specified when designing a harmonized global framework – such as materiality perspectives, metrics, governance, and other aspects – and should build upon voluntary ESG disclosure frameworks and firms’ experience of ESG disclosures to date. Tailoring for different types of firms, including different types of financial institutions, is likely to elevate the quality and degree of comparability of reporting and enable quicker progress. Future non-financial reporting standards should ultimately cover the breadth of ESG topics and not only climate risk, to avoid fragmentation in scope of disclosures over time.
We strongly encourage the relevant international standard setting bodies to take practical steps in the coming months towards a harmonized cross-sectoral ESG disclosure framework. The IIF would encourage the G20, FSB (building on the efforts of the TCFD), accounting standard setting bodies (IASB and FASB) and those initiatives involved in the Corporate Reporting Dialogue to work within their mandates to align and consolidate ESG disclosure frameworks for financial institutions and other corporates. Given the importance to and impact on financial institutions, we would recommend that the relevant prudential standard setting bodies (including the BCBS, IAIS and IOSCO) are also engaged in the process and help shape the framework for financial institutions. Further, there is value in permitting a tier of ESG disclosures that is driven by the individual disclosing firm to encourage ongoing innovation and enable firms to communicate in a manner most relevant to their specific context.
While rapid consolidation at the global level is a pressing priority, the harmonization of expectations should be an iterative, phased process rather than a ‘big bang’. The IIF can play a key role in facilitating engagement between regulators, standard setters, existing voluntary frameworks, and financial industry stakeholders to achieve this objective.