June 17, 2021 | Stamford, CT — Critical sustainability metrics such as direct and indirect emissions, energy performance, climate-related strategies & targets, and social key performance indicators (KPIs) that include pay inequality, employee safety and supply chain practices will experience a meteoric rise in disclosure from companies under a potential new set of global ESG reporting standards. 

A new report, Convergence Cometh, Know Thy Blind Spots, from CRISIL GR&RS, identifies 45 KPIs likely to be included in the potential global framework of ESG reporting standards. International Financial Reporting Standards (IFRS) will likely roll out such standards in collaboration with standard-setting bodies and regional regulators. 

“The inclusion of these KPIs in a set of global disclosure rules will create a new and heightened level of transparency on corporate practices around many important environmental and social issues,” says Abhik Pal, Global Head of Research at CRISIL GR&RS. “However, it’s important to note that even an eventual global standard may not fully integrate financial performance, ESG financial materiality, sector-specific factors and social impact materiality.”

The lack of consistent and globally accepted ESG reporting standards and independent frameworks built from different methodologies has influenced the ESG integration across sustainable investment and lending practices. In such a scenario, the impending guidelines from the IFRS Foundation will serve as a global baseline for ESG reporting and lead to better ESG data and broader coverage among corporates across the world. 

In addition, the EU’s influential Corporate Sustainability Reporting Directive (CSRD) will be a good reference in both the EU and beyond due to its breadth, granularity and alignment with the evolving sustainability regulations in Europe.
To help investors and lenders prepare for the implementation of an eventual global standard, CRISIL GR&RS analyzed 120 KPIs recommended by select exchanges and standard-setting bodies and identified 45 KPIs across the E,S, and G pillar. CRISIL GR&RS also identified an additional 15 KPIs that could attract mandatory reporting across EU corporates and drive reporting requirements aligned to Sustainable Finance Disclosure Regulation (SFDR) and EU taxonomy guidelines.

While exchanges and regulators might gradually provide guidance on sector-specific metrics for corporates to report on, a full-fledged integration of sector KPIs into mandatory international standards is still a long way off. That said, the potential architecture of a globally converged ESG reporting standard will bring both benefits and challenges for financial market participants.

“Impending convergence will significantly influence integration and product innovation and financial Institutions will be able to plug missing data and add depth to sustainability assessments,” says Rahul Agarwal, Global Head of ESG at CRISIL GR&RS. “However, the lack of consistent sector-specific metrics and granular green data at a global level may create blind spots, driving demand for proxies and specialized data sets.”

Convergence Cometh, Know Thy Blind Spots reviews the impact of a global ESG reporting standard and the benefits and challenges to asset managers and banks. Asset managers can leverage the impending convergence in ESG reporting standards to bolster their in-house research, enhance product-labeling standards and build more credibility with asset owners. For sustainable lending teams, the impending convergence will drive granularity across term sheets, climate-risk stress testing and innovative social products.