Investors looking for consistent sustainability reporting

Investors are calling for an overhaul of sustainability reporting standards following concerns that current guidelines prevent accurate and informed investment decisions.

A major survey by consultancy McKinsey & Co, published this week, revealed the majority of investors and company executives are frustrated with the lack of standardisation in sustainability reporting and believe standards need to change.

While over four-fifths of investors (82%) and two thirds of executives (66%) said companies should be  required by law to issue sustainability reports - 89% of investors backed the  notion that there should be fewer reporting standards than currently exist, while 75% want to see just one standard introduced to make giving investment advice easier. Over four fifths of executives agreed with them.

According to the survey, years of effort by standard-setting groups have produced nearly a dozen major reporting frameworks and standards, which businesses have the discretion to apply as they see fit.

The majority of investors said greater standardisation would help them allocate capital and engage companies more effectively, while executives said it would improve their ability to respond to sustainability-related trends, such as climate change and
water scarcity.

More than 60% of investors said greater standardisation would attract more capital to sustainable investment strategies, however a fifth said uniform reporting standards would ‘level the playing field’ and reduce the competitive advantage arising from their proprietary research and investment products.

Respondents cited inconsistency, incomparability and a lack of alignment in standards as the main shortcomings of current sustainability reporting practices.

Investors also harbour doubts about corporate sustainability disclosures due to a lack of third-party audits.

“Nearly all the investors we surveyed, 97%, said that sustainability disclosures should be audited in some way, and 67% said that sustainability audits should be as rigorous as financial audits,” McKinsey analysts state.

The survey quotes a sustainable investing director at a major asset manager who explained the numerous reporting frameworks and guidelines means companies rarely make sustainability
disclosures that can be compared as neatly as their financial disclosures can. “We have positions in over 4,500 companies. Unless [sustainability information] is comparable, hard data, it is of little use to us,” the director said.

The survey notes many investors fail to participate in standard-setting efforts, with some stating they distance themselves because they feel standard setting should address their needs as a matter of course.

However, McKinsey analysts warned that until investors clarify which sustainability disclosures they want and help to rationalise frameworks and standards, sustainability reports might “continue to deliver less material information than they would
like”.

The survey comprised responses from 107 executives and investors, representing 50 companies, 30 asset owners and 27 asset managers and was supplemented by interviews with more than 25 investors, academics and standards organisations.