INTERVIEW with Janine Guillot, CEO, SASB. For further expert opinions please use the question-level hyperlink.
| Many jurisdictions currently 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?
First, it is important to clarify that the two widely used sustainability disclosure standards—SASB and GRI—are complementary, not competing. Investors need global alignment around a system of sustainability disclosure standards that provides international consistency and enables regional customization. This is a big challenge, because different users of sustainability data—including investors, policy makers, and civil society—often have different information needs. Investors need information on the financial impacts of a company’s sustainability performance, while many stakeholders need information about how companies affect the environment and society.
For this reason, no single set of standards suffice. We need a system of standards that is flexible yet comprehensive. Globally, there are only two sets of widely used sustainability disclosure standards—SASB standards and GRI standards. When used in combination, SASB and GRI standards meet the needs of a broad range of users.
Investment portfolios are often global, and many companies operate across international boundaries, yet firms nevertheless must comply with the disclosure requirements in their local jurisdiction.
For asset owners, more standardized sustainability disclosure will result in more relevant, comparable, and reliable sustainability information that informs their investment decisions and better enables them to meet their own disclosure requirements.
| Whilst EU is focused on fostering green and sustainable recovery from the COVID-19 crisis, do you expect the pandemic to have a tailwind or rather a headwind effect on the low-carbon energy transition pace in the US?
In recent years, US investors and companies have increasingly recognized that effectively managing environmental and social issues is essential to the long-term sustainability of both business and society. The COVID-19 crisis is likely to accelerate this trend. As just one example, response to the virus has intensified focus on the importance of human capital in a myriad of ways—some companies reliant on “gig-economy” workers have started offering health care benefits previously unavailable, and employees in various industries have walked off the job to demand more safety protections at work. I expect this crisis to provide new insight into which non-financial performance metrics are critical, and to lead us to think more broadly about what industries these metrics apply to. This may drive a structural shift in how both companies and investors think about delivering long-term value to both shareholders and society.
| Against the backdrop of standard setter warnings like ‘Investors that fail to incorporate ESG issues are failing their fiduciary duties and are increasingly likely to be subject to legal challenge’*, how do you see the future of fiduciary duty in the US in regard to ESG?
In a US context, fiduciaries must put economic interests of plan participants and beneficiaries first. Numerous analyses and peer reviewed publications have found that ESG factors can indeed be material to a company’s operating performance, financial condition, credit risk profile, and/or stock performance. These studies demonstrate that financially material ESG factors are relevant for investment decision making. As such, it is essential that investors have access to comparable and reliable information on sustainability performance that is linked to financial performance. This has resulted in significant support among large institutional investors in the US for improved sustainability disclosure.
| Many have expressed support for climate reporting metrics standardization referring to various disparities e.g. exclusion of scope 2 and 3 (purchased electricity and downstream carbon emissions), focusing only on scope 1 instead (direct emissions from owned or controlled sources). What is your position on this? Do you see the collaborative work plan announced by SASB and Global Reporting Initiative (GRI) as a solution?
SASB standards are first and foremost a tool for companies to communicate with investors about the ESG-related risks and opportunities they face. With that in mind, we try to identify risk and performance metrics that can help users and providers of financial capital more effectively evaluate and manage those risks. Our research shows that seven industries account for roughly 85 percent of global Scope 1 greenhouse gas emissions, so the companies in those industries obviously face regulatory risks related to their carbon-intensity, and therefore direct Scope 1 emissions is a very useful indicator. In many other industries, the primary sources of emissions are indirect and outside the control of the disclosing entity—for example, purchased energy or downstream emissions. Again, in these cases, our approach is designed to identify metrics that can help companies and investors more effectively manage their risk, so we focus on the operational factors that give rise to indirect emissions. These operational factors are the factors that are under the companies’ control and that they can act on to reduce indirect emissions.
A good example is in the Auto industry, where the overwhelming majority of Scope 3 emissions are generated in the use-phase—in other words, they come from people driving cars. Automakers can’t control how much people drive, but what they can do is manage the fuel-economy of their fleet through product design innovations such as lightweighting, offering zero-emission and hybrid alternatives, and other strategies. This approach can help car companies better manage changing fuel-efficiency standards and capture market share as consumer preferences shift, and as a by-product it’s also likely to put a significant dent in Scope 3 emissions. So, the SASB standards include a metric on the use-phase efficiency of the fleet.
Scope 1, 2, and 3 emissions data can be extremely valuable to a broad range of stakeholders, including society, civil society, investors, and others. The GRI standards suggest that companies disclose those emissions, and this is a powerful example of where the SASB and GRI standards are complementary.
* PRI, Fiduciary Duty in 21st Century, Final Report 2019
| about the author
Janine Guillot is CEO of the SASB Foundation