Evolving ESG data: financial materiality, sustainability performance and sustainability outcomes

Driving meaningful data throughout markets is a priority for PRI signatories. The flow of consistent, comparable and reliable ESG data from corporations through the investment chain is a critical enabler of responsible investment practice and a sustainable financial system.

Despite the critical role that data plays, there are a number of challenges faced by investors. The first is the evolving nature of data needed to support investor decision making, both for risk and return and assessing the sustainability performance of corporate entities. The second relates to the reporting system, which is characterised by fragmentation and the lack of end-to-end reporting on ESG issues needed by investors and beneficiaries.

Materiality, sustainability performance, outcomes

For many investors and PRI signatories, the effect of ESG risks on individual investees’ financial positions is still their greatest concern. Quantitative and qualitative data providing insight into the sustainability pressures facing a business and how they impact on a company’s business model and value drivers, and how management is responding to them, are, and will remain, crucial for investment decisions. 

At the same time, market developments are shifting to focus on the alignment or contribution, both positive and negative, of corporate and investor activity in meeting sustainability goals. The continuing divergence of economic development with ever approaching planetary boundaries and less inclusive societies means we need to move beyond financial risk-based thinking and relate our activities to purposeful contributions to sustainability goals or outcomes (see Investing with SDG outcomes: a five-part framework).

The increased recognition of the role of responsible investors in shaping sustainability outcomes as concepts of relevance to financial markets is forcing a reconsideration of the types of decisions they need to make – and “decision-useful” data are needed to support them. To accommodate what we expect will be a multi-faceted need for meaningful ESG data in the future. the PRI’s white paper Driving meaningful data: financial materiality, sustainability performance and sustainability outcomes puts forward a framework to cohesively characterise how entities are managing sustainability risks and opportunities, and how their actions and activities shape or contribute towards sustainability outcomes. It covers three core components:

1. ESG risks and opportunities – ESG factors likely to impact the financial condition or operating performance of an entity (financial materiality).
2. Sustainability performance – How an entity’s operations and products impact (positively and negatively) stakeholders and the environment.
3. Social goals and planetary thresholds – Nationally, regionally, or internationally recognised environmental and social targets, norms and responsibilities within which entities operate from a sustainability perspective.

The first component provides an insight into the sustainability pressures faced by a business and its organisational activities (how it operates, what it produces and where – regional, national, or global) and how management is responding to them. The second provides a comprehensive account to investors (and stakeholders) of how a company has delivered on its sustainability commitments. The third component offers thresholds and goals that put sustainability performance into relative context and to help understand overall progress towards them.

This framework is intended to enable an expanded assessment for investors and corporates – beyond the financial dimension of what is material today and on a limited basis – to  translate social and environmental goals into day-to-day decisions. For investors, statements of good intentions, plans to be more efficient in the future, and incremental improvements from today’s performance all signal that progress is being made. But it can be difficult to calibrate and judge in practice. We are no longer facing a question of “Are we doing better than before”, but “How good is good enough?”^[1]

We argue that data is needed to assess the significance of an issue in terms of its future impact and exposure to it, and where performance is below what should be relative to a goal then decisions can be made to efficiently allocate capital to it. Therefore, a key part of sustainability reporting must target, measure, track, and report on the progress of financing in environmental terms to maximise the benefits and to minimise the mistakes in meeting social and environmental goals. 

The white paper is the first step in bringing together the PRI’s view on driving meaningful data. The challenge of developing consistent and comparable data, resolving system fragmentation, as well as addressing the gaps identified through the framework, will require collaboration with others across the financial and corporate sectors. This includes standard setters, policy makers and regulators, and other key stakeholders. 

Renewed ambition

The PRI welcomes the renewed ambition of regulators (IOSCO, EU NFRD) and standard setters (GRI, SASB, CDSB, IIRC, CDP) to resolve corporate reporting on ESG issues. In particular, the willingness of the main sustainability standard and framework organisations to work together as set out in their statement of intent is a significant development. As they develop their collaboration and detailed work begins, we hope this paper provides a framework to understand the possible spectrum of data needs of investors. And through our collaboration with the World Business Council for Sustainable Development, we will work together as preparers and users of sustainability reporting. We hope to support efforts that result in a truly end-to-end sustainable reporting system.

This paper does not represent the views of our signatories but is the first step in the process of collating a range of opinions to further develop the PRI’s driving meaningful data framework. We welcome feedback on ideas and concepts in this paper from signatories, policy makers, standard setters and industry groups.

This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories.Please note that although you can expect to find some posts here that broadly accord with the PRI’s official views, the blog authors write in their individual capacity and there is no “house view”. Nor do the views and opinions expressed on this blog constitute financial or other professional advice.If you have any questions, please contact us at [email protected].