INTERVIEW with Kerstin Lopatta, a full professor at the School of Business, Economics and Social Science at the University of Hamburg. For further expert opinions please use the question-level hyperlinks.
| The EU and UK, as well as many others, work on ESG-related standards aiming at leadership in the field. Meanwhile, entities like the SEC Investor Advisory Committee urge developing jurisdiction-level standards to avoid other countries imposing their ESG-related requirements on US issuers. What impact do you expect from the competing standards, and what will it mean for asset owners in terms of ESG investing efficiency?
The competition between standard setters and standards is nothing new. When you take a look at CSR or ESG reporting standards you have various providers, benchmarks and reporting standards e. g. GRI, ISO, EFAS KPIs on ESG and more recently SASB and TCFD. From an investors’ perspective that is of course not satisfying because it makes the comparability almost impossible or goes along with costs of unification. What should be avoided in the future is that we face the same situation as we have for the financial accounting standards, especially IFRS and US GAAP. The aim should be to develop one high-quality reporting standard on ESG on an international level, based at the IASB for example. The European Non-Financial Reporting Directive is from an investors’ perspective also only a first step but a good starting point. The EU Taxonomy will specify the reporting requirements step by step.
| Whilst experts warn of the growing inequality and social risks as a result of pandemics, do you expect a persistent ‘upgrade’ of social aspects in ESG risk management providing long-term benefits?
Existing standards are focussing on environmental measures because they have a long history and they are easier to measure. Also, the EU Taxonomy focuses on these environmental measures. But the societal demand for social measures is increasing and there is also empirical evidence that these factors are financially material. Therefore, I am convinced that social ESG factors will be accepted as an ESG risk in the near future.
| What do you suggest as main take-aways for the investment industry adapting their ESG risk management to the pandemic and crisis recovery?
ESG funds performed better in comparison to mainstream fonds during the pandemic. Also, firms’ reporting practices during the coronavirus (COVID-19) pandemic impacts stock market reactions in term of stock performance and risk as our research shows. Therefore it is obvious that not only pandemics but also other nature risks need to be integrated in risk management systems.
| What other systematic changes within a company are, from your perspective, necessary to assure a reliable ESG reporting?
Until now, the internal process of companies gathering ESG information is far away from being standardised. This highly impacts the quality and comparability of ESG reporting. To overcome this problem, we need to develop and incorporate environmental generally accepted accounting principles (E GAAP). The long-term objective would be a coherent and integrated accounting and reporting system, covering both ESG and financial information. The Research Group on Sustainable Finance at the Universität Hamburg, especially Alexander Bassen and Kerstin Lopatta, are working on that topic.
| brief bio
Kerstin Lopatta is a full professor at the School of Business, Economics and Social Science at the University of Hamburg. Kerstin Lopatta has work experience as a consultant in a big 4 audit company and she had several research stays including City University Hong Kong and New York University Stern School of Business. Her work was published in international high ranked journals including Journal of Corporate Finance, Business & Society, Journal of Business Ethics, Journal of Risk Finance and Journal of Business Economics. She has several cooperations with global and small and medium-sized companies. In her current work she investiagtes the EU Taxonomy and its implications for financial accounting and non financial reporting.