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The rise in Environmental, Social, and Governance (ESG) reporting and benchmarking has introduced a wide range of non-financial factors for companies to report against with a view to allowing investors to better evaluate a company's performance, long term strategic resilience and societal impact.
New Zealand is currently at the leading edge of this trend with the introduction of mandatory climate risk disclosures capturing a large number of listed issuers and other large financial institutions.
Other jurisdictions are fast catching up: a report by Chapman Tripp for The Aotearoa Circle showed that the majority of global GDP, representing destination markets for over 80% of New Zealand’s exports (and sources of international capital for our companies) are now covered by mandatory climate disclosures, current or proposed.
The shift to ESG disclosure has coincided with the rapid emergence of an increasingly influential cohort of often younger and tech-savvy retail investors who make their own investment decisions and who do not rely on traditional market intermediaries.
Demand for investing, driven both by ethical considerations and the drive to decarbonise and build resilience into portfolios, appears to be consistent across retail and institutional investors. However, the research increasingly suggests that the manner in which responsible investment frameworks are being adopted is counter-productive in encouraging participation from the retail market segment.
Regulators have played a facilitative role - being proactive in trying to ensure that the risks associated with ESG reporting are identified and managed, providing advice to investors about the risks of ‘greenwashing’, encouraging standardisation via specific reporting standards to ensure consistency and transparency and enforcing compliance through the usual individual and corporate liability mechanisms.
But the effect of these interventions has been a substantial increase in the complexity and length of the disclosures, which gives rise to accessibility issues – particularly for the retail investor who can be turned off by jargon-heavy reporting.
Institutional investors, by contrast, have the resources to process and assess complex disclosures – and are often the target audience in the design of those disclosure frameworks.
The result is a burgeoning industry offering ratings and assessments of ESG disclosures and performance for retail investors as an aid to understanding – in other words, the re-emergence of the very intermediaries that retail investors are increasingly shunning.
And, of course, the reporting by these intermediaries gives rise to the usual issues: rankings are often relative scores, can be quickly out of date and tend to be so broad brush that underlying performance trends are difficult to discern.
In many ways this is nothing new, the story of financial markets disclosure has always been a tension between simplicity and complexity where mandatory disclosures are concerned. For entities producing ESG reporting, including mandatory climate disclosures, it’s a reminder to keep in mind the range of users of that reporting – including retail investors.
Unless it’s simple, it won’t be sweet.
