Summary

Companies must increasingly report on their environmental and social impacts. For example, Directive 2014/95/EU and Directive (EU) 2022/2464 oblige certain companies to report on non-financial metrics and Regulation 2019/2088 sets out ESG disclosure requirements for financial market participants and financial advisers. Also, the UK Financial Conduct Authority consultation paperdetails the UK Sustainability Disclosure Requirements (UK SDR) which will initially apply to certain fund and asset managers (with the policy statement and final rules expected in Q3 20231). The UK Green Taxonomy, once finalised, will supplement the UK SDR. Both the EU and UK are also considering introducing rules to supervise ESG rating agencies. There are also various international voluntary reporting frameworks, such as the GRI Standards and the SASB Standards, which guide companies on how to understand and communicate their social and environmental impacts.

Done well, sustainability reporting can provide important data and reputational incentives to manage and mitigate ESG risks. This is why minimum levels of reporting are baked into the LISI Impact Term Sheet. However, where not supported with consistent strategy, policies, and data (together with transparency of the basis of calculation), greenwashing claims may be attracted.

Many large companies now report on metrics across both environmental concerns (principally focussed on GHG emissions) and social issues (principally focussed on safety and wellbeing). The greater reporting of GHG emissions and safety metrics may be explained bythe longer period of regulatory scrutiny around these figures. Similarly, the more recent focus on wellbeing may reflect the more recent recognition of the importance of staff welfare in achieving company goals.

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