The International Organization of Securities Commissions (IOSCO) is today publishing a statement setting out the importance for issuers of considering the inclusion of environmental, social and governance (ESG) matters when disclosing information material to investors’ decisions.
Disclosure of ESG information in the market has increased in recent years. Examples of ESG matters that issuers are disclosing include environmental factors related to sustainability and climate change, social factors including labor practices and diversity, and general governance- related factors that have a material impact on the issuer’s business.
IOSCO monitors and discusses current developments regarding disclosure of ESG information and the perspectives of different market participants, including investors, issuers, and other stakeholders.
Today, investors’ interest in ESG disclosure is growing and some investors already significantly value ESG matters in their investment strategy. They highlight that such disclosures are necessary to supplement their investment and voting decisions. Such information includes how ESG matters affect the issuer’s approach to long-term value creation, the nature of strategic and financial risks, and the way the issuer intends to manage them. They also ask issuers to report on the impacts (either potential or realized) resulting from ESG matters. ESG matters may represent material risks and opportunities to an issuer or may, under certain circumstances, pose serious threats to the sustained viability of an issuer.
At the same time, some investors have expressed the desire for enhanced reliability and comparability of ESG information and disclosures, in order to facilitate a more accurate assessment of risk and, accordingly, more informed investment decisions.
IOSCO has observed that some issuers are increasingly disclosing ESG information, either on a voluntary basis or as a result of compulsory requirements at a local level. This trend has resulted in an increase in the overall level of disclosure of ESG information in some industries. However, IOSCO also observes that disclosure practices remain varied among issuers. The type of information disclosed, as well as the quality of information, may differ in and between markets, depending, for example and among other reasons, on the disclosure frameworks used, the disclosure requirements and definitions of materiality imposed by jurisdictions, or the materiality of specific ESG matters to a particular issuer.
Voluntary disclosure frameworks
There are various interest groups and private sector bodies that are active in the area of disclosures related to environment, carbon emissions, climate, social or governance related matters. They have developed various disclosure frameworks that issuers may consider on a voluntary basis when disclosing ESG information. Such frameworks often aim at facilitating and guiding the disclosure of ESG information and attempt to enhance the comparability of such disclosures for investors. Amongst the different frameworks available to issuers in the field of climate change are the disclosure recommendations and methodology developed by the industry-led Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD).
The TCFD has developed climate-related financial risk disclosure recommendations that may be used by companies to provide information to investors, lenders, insurers, and other stakeholders. The objective of this guidance is to facilitate more consistent disclosure practices and encourage firms to align their disclosures with investors’ needs. Similarly, there are other reporting frameworks that have been developed to include ESG matters, including, but not limited to, the Carbon Disclosure Project (CDP), the Global Reporting Initiative (GRI), and Integrated Reporting (IR).