Credit Suisse's group head of Sustainable Investing and Finance Frameworks says CFOs armed with standardised data will likely see an increase in return-on-investment and a decrease in their firms weighted-cost-of-capital
Imagine you are about to make a large investment on behalf of your company – it is time to replace your aging technology infrastructure.
You meet with a supplier, and they quote you a price: it is as many 100-dollar US bills as you can fit into a bucket. Puzzled you ask how large the bucket is? And their response is a nonchalant shrug. Without standardisation in measurement, scope, and units, it is extremely difficult to make informed investment decisions.
When it comes to sustainability data, we are, sadly, often dealing with metaphorical buckets and a lack of standardization. For CFOs, this makes fully incorporating sustainability data into business and investment decisions challenging.
The challenges with sustainability data are numerous, despite more than 90% of large public companies issuing an annual sustainability report (Threlfall et al., 2020).
The first challenge is a lack of commonly accepted standards for reporting. According to The Reporting Exchange, an online tool developed to help corporates navigate the landscape, the number of voluntary and mandatory reporting requirements and frameworks exceeds 2,000.
Even with a tiny sample of the nine voluntary reporting frameworks that The Reporting Exchange identified, there are more than 1,400 potential indicators that companies could use to disclose their sustainability performance and aid their CFOs in business and investment decisions (Arabesque, n.d.).
The second challenge is limited data quality and assurance. According to KPMG, 71% of the world’s largest 250 companies felt the need to – or were able to – obtain some form of external verification of their figures in 2020 (Threlfall et al., 2020). However, the Investor Responsibility Research Centre Institute (IRRCI) found that 90% of assurances dealt only with partial data (Kwon, 2018) and the gap between the rigour of financial data and sustainability data remains wide.
The third challenge is that there is a temptation to produce data on a plethora of sustainability issues, most of which have limited relevance to business and investment decisions. Analysis by Danske Bank of 100 Nordic companies found over 20,000 individual sustainable data points, of which just 28% were deemed material to an investment case (Hakola, Poll and Vannefors, 2020).
Without common standards for reporting, in the absence of quality and third-party assurance, and with immaterial data distracting from material topics, CFOs have a difficult time utilising sustainability data to aid business and investment decisions.
It hardly comes as a surprise then that CFOs and other executive managers feel exasperated by the current situation.
According to an International Organization of Securities Commissions survey, “the majority of [corporate] respondents expressed concerns that data requests from ESG ratings and data products providers are time-consuming because of the number and frequency of the questions set out in the questionnaires” (IOSCO, 2021).
Furthermore, a McKinsey survey revealed that 58% of corporate executives “agreed” or “strongly agreed” with the statement: “There should be one sustainability-reporting standard.”
Thus, when seeking a solution, CFOs can do a lot worse than pursuing industry-wide standardisation by backing one of the aforementioned 2,000 disclosure frameworks currently in circulation.
The leading candidate to help aid business and investment decisions is the International Sustainability Standards Board (ISSB). The ISSB was founded in 2022 as the Sustainable Accounting Standards Board (SASB) merged into the International Financial Reporting Standards Foundation’s (IFRS), the latter being one of the industry’s two major global accounting standards.
SASB is particularly relevant for CFOs as it focuses on the data that is most relevant in determining the value of a firm, so called single materiality. SASB covers over 70 sectors with industry-specific standards and metrics that reflect the topics most relevant to the financial health of companies.
CFOs choosing to support SASB / ISSB are in good company; a 2021 survey found that almost 50% of large corporates already referenced SASB standards to some extent (GRI and SASB, 2021).
And the standards have found favour with investors, most notably BlackRock CEO Larry Fink, who in his 2020 letter to CEOs stated: “BlackRock believes that the Sustainability Accounting Standards Board (SASB) provides a clear set of standards for reporting sustainability information across a wide range of issues, from labour practices to data privacy to business ethics.” The ISSB thus represents the most likely candidate to bring standardization to sustainability data.
Once armed with standardised data which is relevant for their businesses and comparable to their peers, CFOs would be able to better price environmental, social, and environmental risks and opportunities.
This would lower the risk associated with making business and investment decisions and would thus logically drive an increase in return-on-investment and a decrease in their firms weighted-cost-of-capital, as charged by investors. These are highly beneficial outcomes for any CFO.
Returning to our initial premise, the standardization of sustainability data has the potential to make the indeterminately sized bucket a thing of the past. Ultimately, standardizing sustainability data would aid CFOs in making better business and investment decisions.
James Purcell is the co-author of new book, Sustainable Investing in Practice (Kogan Page, £34.99).
