CPP Investments pushes boards beyond 'box-ticking' ESG disclosures
As ESG disclosure gains momentum in Asia, following its mandatory implementation in Europe, certain investors go well beyond increasingly seeking sustainability data from their portfolio companies. They are also urging corporate boards to treat such reporting as more than just a box-ticking exercise.
“Those corporations that prepare [environmental, social and governance] data simply to disclose it will incur all of the costs and none of the opportunity,” Richard Manley, chief sustainability officer at CPP Investments, Canada’s biggest pension fund manager, said at a recent conference.
“Those that believe this exercise is intended to deliver decision-useful insights will capture all of the opportunity, and the benefits of that will overwhelm the cost," he added, speaking on a panel session at the Climate Investment Summit during Climate Action Week in London in late June.
Manley told AsianInvestor after the discussion that CPP expects companies to report on material sustainability factors that could reasonably impact the value of their business.
ADVANCES IN ASIA
When asked about the progress being made in Asia in this area, he said: "Given the number of markets in Asia that have initiated a process towards adopting the ISSB, we expect to see a meaningful increase in Asian reporting and increasing convergence across the globe."
Companies in Asia will soon be directly affected by ESG reporting requirements set to be introduced in the coming years in markets such as Hong Kong, Singapore, mainland China, India, Korea and Australia. Some jurisdictions in the region are moving to align with the International Sustainability Standards Board (ISSB) disclosure standards.
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Many businesses may have already received requests for sustainability-related data from their head offices or shareholders based in the European Union (EU), given that the Corporate Sustainability Reporting Directive came into effect this year. Starting from 2024, nearly 50,000 companies, including non-EU companies with subsidiaries operating within the EU or listed on EU-regulated markets, are subject to mandatory sustainability reporting, according to consultancy EY.
STRATEGIC ADVANTAGE
During the panel, Manley emphasised that companies should leverage ESG reporting as a strategic advantage. The question is how they capture the opportunities, he added.
CPP, which manages some C$632 billion ($463 billion) of assets, puts a series of questions to boards to ascertain where they stand in this respect, Manley said.
Firstly, the pension fund wants to determine whether a board can demonstrate clear governance and oversight of sustainability.
Next, has the board ensured that the executive team has conducted a materiality assessment to identify the material business risks and opportunities related to both the industry and the jurisdiction in which the company operates?
Then, if the executives have indeed completed a materiality assessment, have they put in place the appropriate policies, reporting mechanisms and incentives to improve performance against relevant metrics, to capture opportunities and mitigate risks?
ALIGNING WITH ISSB
“Any company that can say yes to those three questions should be able to align reporting with ISSB S1,” Manley said, referring to the general requirements for disclosure of sustainability-related financial information.
This leads to the next two questions. First: if a firm operates in a jurisdiction that has put forward policy guidance via its Nationally Determined Contribution (NDC) to regulate the decarbonisation of its economy, has the board fulfilled its duty by ensuring the emissions baseline has been set, and that the key levers needed to decarbonise the business have been identified? (NDCs are climate action plans to cut emissions and adapt to climate impacts.)
The final question, according to Manley, is: “Given the company is likely to operate in jurisdictions where 1.5C or more of warming will pose a direct risk to its operations and value chain, has the board discharged its duty, if it hasn't sought to identify those risks and remediate them?”
The ability to answer these two questions aligns with reporting ISSB S2 (the climate-related disclosures), he added.
Companies whose boards are discharging these duties properly should be able to adopt the ISSB standards quickly, Manley said.
While investors like CPP will eventually benefit from such ESG disclosures, “the primary beneficiary will always be the board. It's going to go into the board before it ever comes to us,” he argued.
Another Canadian pension fund, British Columbia Investment Management Corporation, also recognises the challenges of obtaining ESG data from companies, especially in emerging markets, and is developing an internal ESG data platform to address this need.