The concept of “materiality” is key to ESG investing. As part of the evolution of new sustainability reporting standards investors and asset managers will have to consider not only financial materiality but also sustainable (environmental & social) materiality.
“Double Materiality” is the direction the EU Commission is moving towards and also part of converging sustainability reporting standards (TCFD, SASB, IRC, GRI and others).
| Company & Sector Taxonomies
Until we see a universal comprehensive global non-financial reporting standard companies will work with their own company- or sector-specific definitions, taxonomies, categories and datasets. Financial analysts and ESG analysts are supporting companies in various sectors to create frameworks which enable them to meet future disclosure and reporting requirements. Companies depend on guidance and support from outside to compare and benchmark against other players in their industry.
| Assessment vs. Disclosure
Managing business risks and calculating the potential financial impacts includes all types of risks – internal and external. More recently the focus of attention has been on the impact of environmental and climate change risks on companies.
Energy companies, and in particular the oil & gas sector, which are polarizing the ESG investor community had to review their risk management process and integrate ESG factors in their risk assessment as “net zero” commitments grow and fossil fuel exclusion became a common strategy. But there are also other strategies investors can apply as divestments don’t solve the problem of the need for change of company strategy and operation.
“Temperature Alignment” approaches support companies with low or high GHG to understand their pathway to be considered in line with objectives of the Paris agreement. Even if the level of GHG is still high the company might be considered to be included in ESG funds based on the momentum of the decarbonization trend. Much work is done on a company-level which is not yet reported or disclosed.
Internal risk management assessment
vs. external disclosure and reporting
The challenge for ESG analysts, investors and asset managers will be to understand how the data released and disclosed relate to the overall internal risk assessment and capacity to manage risk within the company. This has an important impact on today’s valuation of companies. The company specific approach to develop an integrated risk management and disclosure framework will have important impacts on future valuations of the company.
| Companies and Countries will have to deliver
The emergence of global non-financial reporting standards is monitored by companies and their service providers very closely. The energy sector will attract special attention. But not only companies will be in the spotlight as EU countries will have to deliver on their ambitions in connection with the 10-year integrated national energy and climate plans (NECP) for the period from 2021 to 2030.