Ekaterina Grigoryeva, former Environment and Social Development Specialist (Global Lead, Financial Sector), The World Bank

Below is an insight into what can be expected from Ekaterina’s session at Climate Risk USA 2023.

The views and opinions expressed in this article are those of the thought leader as an individual, and are not attributed to CeFPro or any particular organization.

Are there any disparities in ESG disclosure requirements between regions? How will this impact institutions?

We should first remember that ESG disclosure based on regulatory requirements is a relatively new phenomenon. Europe/EU seems to be the trendsetter, driven by the EU Taxonomy, a cornerstone of the EU’s sustainable finance framework and a vital market transparency tool. In Europe, it is all about directing financial flows toward a clearly defined set of sustainable activities and meeting climate commitments. Investors and companies are hence required by regulation to complete certain disclosures. It is not news to anyone that SEC disclosures in the US are currently on a slower trajectory.

But decades ago, starting in the 1980s, development finance institutions pioneered ESG disclosure trends via their sustainability policies and operational procedures precisely because relevant regulation was – and still is – lacking in those parts of the world where DFIs invest. DFIs started requiring their clients to disclose a lot of technical ESG information regarding the projects supported with development finance. Transparency in this area has long become a cornerstone of operational models of most, if not all, international development finance.

From there, it trickled to commercial investors through early frameworks like the Equator Principles. Then it spread further through a growing number of initiatives in which investors and banks came together around the values of ESG and climate transparency, and voluntary disclosure. Examples include the Task Force on Climate-Related Financial Disclosures (TCFD) and Taskforce on Nature-Related Financial Disclosures (TNFD). Most recently, regulators followed suit. As a result, understanding voluntary ESG disclosure may be, in some ways, more advanced and practiced for longer in emerging markets today. Therefore, once regulators in these markets come up to speed on mandatory ESG disclosure regimes, they may find a more prepared set of companies and investors to work with.

What controls and systems can be implemented to ensure institutions meet disclosure requirements?

Based on a vast experience working with investor-driven ESG disclosure policies and requirements, this will not be so much a matter of controls as building the capacity of companies and other entities to organize themselves internally to quantify and report consistently. No “stick” would be as effective at achieving coherent disclosure practices as providing any support possible to encourage and enable systems and skills to be built to embed ESG processes throughout institutions to allow them to collect and organize the necessary data.

We should also remember that disclosure is only one part of the internal ESG management systems that companies and financial institutions need to have for this disclosure to be meaningful. Given that the market for ESG professionals is still young, many institutions are struggling to retain talent with enough capacity to build such systems without structured and accessible external support, potentially from the regulators. This technical assistance aspect needs to be included in the regulatory ESG disclosure initiatives in the EU and US.

How can firms overcome fragmented disclosures globally?

I wish we had an easy solution to this issue, but we are still looking for something. It is closely related to the lack of capacity issue mentioned above. One of the biggest reasons quoted today for fragmented disclosures is the lack of reliable data that investors can obtain on their portfolio, for example, or that they can collect about their supply chains, especially if they are global. Scope 3 emissions discussions come to mind as one of the biggest challenges.

The current market landscape for ESG data overlooks that companies and investors tend to (over) rely heavily on third-party data providers instead of developing internal capacity for ESG due diligence and analysis. Since external providers are disconnected from their internal operational systems, most institutions desperate for ESG data to meet their disclosure requirements are in a handicapped situation. They have all the means to have first-hand access to data if they take the time to properly embed ESG control points into their operations and have this data flow to them on terms that fit with their business models. External datasets can complement this approach but should not be replacing it, but the latter is, unfortunately, what is happening today.

Can you outline the SEC disclosures on transition risks and the impact this will have on institutions?

SEC rules for climate change disclosures, including transition plans, are a welcome development for many of us who have been working on sustainable finance for several decades and could not dream of such progress at the regulatory level 20 years ago. That said, I do not expect the impact of disclosure itself to be very significant in making a fundamental change in how institutions act regarding their climate commitments. The expectation is that more transparency will incentivize investors to shift capital flows toward more sustainable activities and business models. But I do not see this happening as a result of disclosure alone, without proper operational incentives for more robust and more meaningful climate change strategies, including those related to transition.

What reputational risks could incur as a result of disclosures?

Reputational risk does not occur as a result of disclosures; it appears as a result of business operations that do not meet growing stakeholder expectations on ESG. Even if not officially disclosed, this information will find its way to the public through organizations that make it their core mission to hold the investment community, or more recently, the regulators responsible. As they do not have first-hand knowledge or complete relevant information as opposed to the institutions themselves, reputational damage can be significant.

Development finance institutions have faced intense ESG-related stakeholder scrutiny for several decades in their global operations. These institutions deployed a greater level of disclosure as a core tool for managing stakeholder engagement in a more consistent and transparent manner and as a means to reduce reputational risks. Being concerned about more disclosure causing reputational risk would be counterproductive in this environment.