The economic case for ESG disclosure
When it comes to corporate transparency, the United States is at a crossroads. To one side is maintaining the status quo, with a patchy reporting landscape for environmental, social and governance (ESG) information. On the other side is an opportunity to take action to create an ESG disclosure system that provides consistency and delivers quality data.
Because many American companies are already reporting on ESG voluntarily, implementing such a system would not increase costs, and could actually ease the burden by increasing clarity and certainty in the market. Even more importantly, by requiring uniform ESG disclosure, the policy would engage the companies that are not yet reporting and thus providing essential information that investors and other stakeholders require.
Against this backdrop, I applaud the U.S. House Committee on Financial Services for its recent legislation requiring ESG disclosure. On July 10, I had the honor to testify before the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, as part of their examination of ESG proposals. I made clear that GRI supports the ESG Disclosure Simplification Act.
If adopted, this Act will strengthen reporting by leveling the playing field for U.S. listed companies through an ESG disclosure requirement. It will also help unlock free trade by relying on independent, international standards — such as the GRI Standards, which are already included in the policies of more than 60 countries globally. Just like financial reporting, it is essential for policy makers in the U.S. and around the world to focus on a single international standard for ESG disclosure — a “common language.” And that is what GRI provides.
We created the GRI Standards to give organizations the tools they need to effectively collect and report ESG information. Today, GRI is the world’s only independent, multistakeholder ESG standard setter.
The trend lines are clear: More than 90 percent of the largest 250 companies in the world report ESG information, and 75 percent of them apply GRI’s framework. That includes many in the U.S. The GRI Standards are used by more than 600 U.S.-headquartered businesses, and nearly 80 percent of companies in the Dow Jones Industrial Average.
Recognizing this trend, governments around the world are implementing policies to create uniform ESG reporting as a necessary part of a healthy and competitive business environment. We are currently tracking 139 policies in 61 countries that specifically reference or require use of the GRI Standards for ESG reporting. More than 60 of these policies are capital market disclosure requirements, in 45 countries.
I have witnessed the benefits of such reporting first hand. For two decades before joining GRI, I worked with large U.S. companies, all of which reported ESG information. It’s effective because companies run on data. By identifying, measuring — and most importantly reporting — the material ESG topics, these issues are managed, and performance improves. Effective disclosure is crucial because it enhances accountability and credibility and provides investors with the clear, comparable data for effective decisions.
Within the company, ESG information is not only relevant to corporate responsibility professionals. Senior executives, finance directors, company secretaries and accountants are increasingly understanding the business value and financial impact of using ESG data to inform decisions.
Because today’s ESG information has moved into the mainstream of corporate disclosure, the bills under consideration in the House Finance Services Committee are an essential ingredient to effective and efficient financial markets. Globally, $30.7 trillion in assets are managed using ESG data, and this number grew by 34 percent in two years. A recent survey found four in five mainstream investors are relying on sustainability disclosures to make investment decisions. This growing demand for so-called “non-financial” information is recognition that, in fact, it can have significant financial impacts.
Like financial disclosure, companies are expected to report on the most material issues. Unlike financial disclosure, the determination of what constitutes a material issue must take into consideration the company’s impact on the world around it, rather than only focusing on shorter-term impacts on the business itself. This holistic view means these externalities can be identified and managed, which helps companies mitigate risks and perform better over the long term.
As the world’s largest economy with the most companies reporting ESG information, the United States must show leadership to establish clear, concise, consistent and comparable ESG disclosure based on independent, international standards. I hope that lawmakers on both sides of the aisle will find a way to work together to make this a reality. Committing to a path toward greater ESG transparency will protect investors, help unlock free trade, and ultimately align capital with more sustainable business practices.