High-quality ESG data makes it easier to assess companies’ creditworthiness
Corporate sustainability reports often emphasise climate and the environment, but social and corporate governance issues also play a role in the equation. There is still room for improvement in the reporting and measurement of sustainability information.
As spring approaches, companies are again gearing to publish financial statements, annual reports and sustainability reports. The latter of these are a varied bunch: a handful of large corporations put out extensive and in-depth publications, whilst at the other extreme, more than a few lines may be hard to come by.
At OP Corporate Bank, Head of ESG Asko Siintola and his team analyse companies’ creditworthiness from the perspective of sustainability. Analysts are all too familiar with the current state of affairs, in which information is difficult to find and its analysis requires an arsenal of tools for enriching the data into practical form, followed by a great deal of qualitative interpretation.
“The information is out there, but often in a poorly usable format. We understand the big picture and the inclusion of soft values, even as it poses a challenge to identifying sustainability issues relevant for our work from a large mass of data,” Siintola says.
In particular, smaller companies may hesitate to take up sustainability reporting. Siintola says that this is in many ways understandable as the regulations on reporting and disclosing business information are not binding on small and medium-sized companies.
“Sustainability reporting cannot be simply a passing trend but a coherent and transparent way to share information about a company’s sustainable practices and ESG targets and how they are tracked.”
Businesses show interest in sustainability – common reporting frameworks are already available
In Siintola’s view, sustainability reporting is ideally based on financially relevant KPIs that are directly connected with the company’s business. In this model, the number of indicators would be limited and they would be standardised to allow comparisons between businesses.
When it comes to the types of KPIs, much rests on international practices. A widely used framework in sustainability reporting and one advocated by Siintola is the Global Reporting Initiative (GRI).
“GRI is based around identifying relevant themes in a model that also takes stakeholders’ interests into account. However, the definitions of KPIs used in GRI standards are not always easy to follow.”
Another commonly used framework is published by the Sustainability Accounting Standards Board (SASB). The licence-based model helps identify financially relevant themes and assists businesses in selecting the right KPIs.
Siintola sees the potential future collaboration of GRI and SASB as a way to improve the quality and comparability of data. Jumping into the fray is the International Financial Reporting Standards (IFRS) foundation, which in early February announced its intent to launch its Sustainability Standards Board initiative at the upcoming United Nations Climate Change Conference in November 2021.
“It is evident that sustainability is a theme that attracts interest and for which there is a clear market. The industry for producing ESG data is under fierce global competition,” Siintola says.
For the time being, however, making use of this data requires application. Going forward, it is essential that information be made available in a more easily usable format. A market exists for data analytics tools, and their development is also receiving a push from regulations.
“For example, the European Banking Authority (EBA) has included in its lending advice that beginning in the summer of 2021, ESG issues, in particular climate and environmental risks, must be taken into account in credit decisions.”
Besides environmental and climate factors, social KPIs are also essential
Many of the tracked KPIs and metrics vary from industry to industry, even if issues such as the environment and climate are nearly universal in their impact. In the KPIs for social sustainability, the position of employees as an asset for the business should also be clearly reported.
“As a bank, our first impression of a business is based on public information. After this, our insight into the customer deepens through individual and detailed analysis,” Siintola says.
What, then, is the best place to begin reporting on ESG data? In Siintola’s view, businesses should include at least the following KPIs in sustainability reports:
- CO2 emissions, calculated according to the international GHG Protocol. The calculation includes the company’s direct emissions as well as indirect ones related to purchased energy and supply chains.
- Climate risk assessment on how the company is affected by physical and transition risks and how these are addressed
- Local environmental impacts on water quality and biodiversity, for example
- Employee turnover, sick leaves and accident frequency using standardised definitions