At the Forefront of Sustainability Management

• Sustainable

Hiroko Matsumoto, Reporter/ESG editor, Nikkei

We asked Ms. Hiroko Matsumoto, an ESG editor at Nikkei, on the impact to companies and their responses over SDGs (Sustainable Development Goals) corresponding with the expected regulatory changes coming.
This article was summarized and translated from the webinar broadcasted on November 30th, 2021.

Corporate brand image will improve, but how about stock prices?

According to the result from Nikkei SDGs Management Survey, more than half of the companies said that their SDGs efforts had a positive effect on their corporate brand image. In addition, 40-50% said it had a positive effect on employee engagement and recruitment. On the other hand, many did not feel it improved business performance and stock prices. Only 30% of the companies felt it had a positive effect on their market value.
This is an interesting coincidence to what I hear when I talk to companies. They say that even putting great effort on disclosing the details about their SDGs related activities, they don't feel the gain in their corporate value.

So why are their activities and disclosures not valued by the market?
I think there are two major factors, especially related on the investor side.

What is the (common) disclosure standard?

A unified standard would be needed for investors to evaluate companies more fairly.
Although, currently, there are confusingly miscellaneous standards for ESG information disclosure. For example, there are standards from the GRI (Global Reporting Initiative) that require a broad range of items, SASB (Sustainability Accounting Standards Board) requiring key indicators by industry, and TCFD (Task Force on Climate-Related Financial Disclosures). Those contents vary widely, and companies are puzzled and hard to decide which disclosure standards they should follow. To investors, the content of disclosure differs from company to company, making it impossible to make side-by-side comparisons.

Upon the growing concern over the problem of disparate disclosure standards, a rising movement toward integrating, and unification of standards has begun. As one of the results of this movement, SASB and the IIRC (International Integrated Reporting Council), which formulates the International Integrated Reporting Framework, established the VRF (Value Reporting Foundation) by merging in June 2021.
In 2020, the IFRS (International Financial Reporting Standards) Foundation announced its intention to create a common global standard for ESG information disclosure. In 2021, at COP26, the ISSB (International Sustainability Standards Board) was announced its establishment under the IFRS Foundation. The ISSB is basically a set of standards designed for investors, and the first step is to develop standards related to climate change, based on the TCFD recommendations. They are planning to release a draft of the disclosure standard in January to March 2022 and publish in June or somewhat later in the year. It has also been announced that ISSB would complete the consolidation of the CDSB (Climate Disclosure Standards Board) and the VRF by June 2022.

While the major organizations for standards development will be integrated to the ISSB, the creation of a unified global standard and its wide spread of use is speeding up.

ISSB prototype of the climate change disclosure

The prototype of climate change disclosure standard was announced with the establishment of ISSB, developed by TCFD, VRF, CDSB and others. In align with TCFD recommendations, the disclosure consists under 4 pillars -- "governance", "strategy", "risk management" and " metrics and targets” (Table 1).

Table 1. Overview of the ISSB prototype

There are metrics that are required to be disclosed across industries (Table 2). As for greenhouse gas emissions, the Scope 3 is set to all companies (while in TCFD recommendations, it depended on whether it is important to that company), which is somewhat groundbreaking. However, it does not specify which of the categories should be disclosed and to what extent.

Table 2. Cross-industry metrics in the ISSB prototype

The ISSB prototype also points out industry-specific metrics that are quite different from the TCFD’s guideline. This was introduced from SASB definitions. Detailed topics and metrics are specified for each industry. Such as for “Apparel, Accessories & Footwear”, the disclosure topic is “Raw Materials Sourcing” and the accounting metric would be the following two -- “Description of environmental and social risks associated with sourcing priority raw materials” and “Percentage of raw materials third-party certified to an environmental and/or social sustainability standard, by standard (percentage by weight)”.

Outcomes of COP26 and rise of biodiversity

The below list shows some of the key outcomes from COP26 (United Nations Climate Change Conference in Glasgow, held between October 31, 2021 to November 13, 2021).

●Glasgow Climate Accord (all member countries agreed)

• Phase-out of coal power generation
• Phase-out of subsidies for inefficient fossil fuels
• Revisit and strengthen emission reduction targets for each country in 2022
• Carbon market rules (avoidance of double counting, etc.)
• Early achievement of $100 billion in annual financial support and continuation through 2025

●About 100 countries agreed

• Reduce methane emissions by 30% by 2030 compared to 2020

●About 130 countries agreed

• Forest conservation and restoration by 2030

With the pact on re-introducing the importance of the forests, ESG investors are paying more attention and primary industries such as agriculture and forestry could be attracting their focus.

Investors' interest will expand from climate change to the environment in general. In 2020, climate change was the hot topic. In 2021, at COP26, forest conservation was featured. In 2022, biodiversity should be creating great attention starting at COP15, known as the Convention on Biological Diversity.

From the results of SDGs Management Survey, in terms of plans over risk/opportunity analysis and disclosure, more than half of companies have set targets for climate change, while only around 30% have set targets for biodiversity. Regarding natural capital, a disclosure framework similar to TCFD is scheduled to come out soon, and companies will be required to respond eventually. As more attention is paid to initiatives regarding natural resources and biodiversity, it will most likely be reflected in the evaluation of companies. I would suggest companies to not think disclosure around natural capital and biodiversity is meaningless but should be prepared and disclose proactively.

Corporate governance and human rights

In Japan, there was a revision of the Corporate Governance Code in 2021. A focus on ensuring diversity of core personnel was included. Not to argue that climate change is possibly the largest topic in sustainability disclosure, but human investment and human resources are emerging as another major topic, that is sure to attract more attention from investors.

Over the past years, investors have been shifting their focus from improving diversity to investing in human capital. In 2020, diversity and inclusion of women was still a big issue. In 2021, as problems of human rights issue over Myanmar and Uyghur area arose, demand for aligning to the human rights is getting stronger. Germany and other European countries adopted a new supply chain due diligence law. In the coming future, human capital would be paid attention from a much broader perspective. For example, in the service industry, how well a company utilizes its human resources may be evaluated.

Advanced case study: Public Benefit Corporation (PBC)

Allbirds, a company that provides shoes and other products made from natural materials such as eucalyptus went public. It is a Public Benefit Corporation (PBC) in Delaware, a form that is attracting attention around the world. While most companies focus on profit, PBC aims both public benefit and profit at the same time. There are others known as similar form, such as Lemonade, an insurance company, and Vital Farms, a chicken farm operator providing humanely raised eggs.
Allbirds attracted attention because it presented its Sustainability Principles and Objectives Framework (SPO Framework) and made clear its commitment to ESG standards (Table 3).

Although PBC are still not common, I see this as one of the possibilities of an advanced form of organization -- to make commitments publicly and disclosing its examination of progress on its way.