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Welcome to the Sustainable Finance Guernsey podcast page.
Guernsey Finance is a joint government and industry initiative tasked with promoting and connecting Guernsey as a leading international finance centre.
Named as one of the Green Finance Guide's top 10 must-listen sustainable finance podcasts, our broadcasts feature news, insights and discussion about green and sustainable finance, and the contribution which Guernsey, as a global leader in green finance, is making in this space.
Rosie: Hello and welcome to the latest episode of the Sustainable Finance Guernsey podcast, rated one of the top 10 most useful sustainable finance podcasts by Green Finance Guide. Guernsey is one of the jurisdictions leading the way in green and sustainable finance and as part of this podcast series, we speak to and learn from some leading global figures in the field. My name is Rosie Allsopp, I am Communications Director here at Guernsey Finance.
We are the island's promotional agency for the financial services sector and today I'm absolutely thrilled to be speaking to Claire Dorrian, who is Head of Sustainable Finance, Capital Markets and Post Trade at LSEG, the London Stock Exchange Group. With a background in equity capital markets, Claire is now responsible for leading the portfolio of sustainable finance related projects across London Stock Exchange Group's markets business which includes equities, fixed income and ETPs.
Claire has played an important role in the development of model sustainability reporting guidance for London Stock Exchange listed companies and initiatives such as an ESG disclosure tool, the publication of a Guide to Green Finance and Green Economy mark for AIM and main market companies. She is also a member of an industry task force, full scaling voluntary carbon markets and part of one of the new working groups set up by the Transition Finance Council.
Today we're going to be discussing how investors are using sustainability data, the evolution of the sustainability reporting landscape and key principles of best practice detailed within the London Stock Exchange's recently released guidance on sustainability reporting. Thank you so much for joining us, Claire - It's absolutely wonderful to have you on the podcast today.
Claire: Thanks Rosie for inviting me, delighted and looking forward to our conversation today.
Rosie: Yeah, so let's kick off. Can you tell me a bit about how the sustainability reporting landscapes changed in recent years and as such, why the London Stock Exchange decided to produce this guidance?
Claire: Yes, of course. You've articulated that very clearly straight away that there's no denying that the landscape for sustainability reporting has changed drastically over the last say five years or so, and what we're seeing now is many countries have got sustainability reporting requirements for companies with increasingly detailed specifications around them.
Then what you're seeing at the same time is investors and stakeholders are demanding more detailed information about how the companies are managing some of their material sustainability related risks and opportunities and you've got also investors and policy makers around the world recognising that sustainability related disclosures are going to be an important part into capital allocation decisions.
We first published some ESG guidance back in 2016 actually and that was based on eight different principles that we thought, at that time, reflected the goals of investors and the voluntary sustainability frameworks that were in place at that time; but as I said the change in reporting landscape, we felt that then there was an opportunity to support our listed companies, help them to develop a better understanding and the case for sustainability reporting, and help them specifically with things like the why, the how, and the what and demystify a lot of what is out there at the moment.
What I mean when I say the why for sustainability reporting - It's really about how you develop a deeper understanding of why you're actually producing sustainability reporting, who you're reporting to and the value of thinking beyond just meeting reporting obligations. Then it's thinking about the ‘how’ do you deliver robust reports?How do you consider the structure, the resources that's needed, as well as some of the decisions that you need to take to successfully deliver essentially a decision used for sustainability report terminology that you often hear and finally, but I think very importantly, companies need to actually consider what type of data investors need.
While reporting requirements may differ between countries, the importance of actually understanding the characteristics of investment grade data is going to be applicable to all investors. So, we need to take time to put yourself in the investor's position, learn more about what they are actually looking for.
We believe that the guidance that we've produced today is a reflection of where the market is and hope that companies find it useful and as the landscape continues, I'm sure we're going to have to adapt it as well.
Rosie: It does feel like it's a continually evolving landscape, doesn't it?
As we've said, sustainability reporting is becoming a regulatory requirement in a growing number of jurisdictions, but many jurisdictions are approaching it in a slightly different way from one another, which can make reporting difficult for companies operating, especially in multiple jurisdictions.
How can companies mitigate those kinds of difficulties, and maybe you could touch a little bit on how important are international frameworks such as the ISSB standards and what sort of impact they can have?
Claire: When we were thinking about this it's actually what are some of the trends as well actually that you're seeing in sustainability reporting because that influences how then the companies need to mitigate those. You've got the number of reporting related regulations growing across different jurisdictions, you've got more and more companies now within scope of sustainability reporting regulations that weren't historically. Companies are very much expected to report on a much wider range of topics, they provide more detail and they need to follow more prescriptive standards and frameworks.
There's also a much greater attention that's being paid to the accuracy of reporting and more focus on things like audit and verification and lastly, there's a growing connection between sustainability and financial reporting, so now turning that into how can companies actually navigate through all of this.
What we hear when we talk to companies who are operating in multiple different countries is that they face different reporting requirements and what they're seeking to do is start with the most demanding and comprehensive obligations and use that to build their reporting on from there.
Then what companies are doing is really cross-checking that against other regulation, using different mapping tools to make sure that their reporting is complete and they don't have any gaps within it; but I just think despite that progress that's being made on that international alignment, there are some inconsistencies in these requirements, particularly when you get to quite a technical level and I think also the regulation is making companies need to gather, process and report country specific data and or analyse data in slightly different ways. You mentioned Rosie, the frameworks like ISS - I think that landscape of sustainability reporting has transformed very much from that voluntary based disclosure regime to one that is becoming more defined by regulatory reporting requirements. For example, the task force for climate related financial disclosures, TCFD, that those recommendations have been incorporated into regulation in various different jurisdictions including the UK and Japan and New Zealand.
Given that complexity of reporting requirements, there's been much more of a move towards trying to establish that global baseline through the adoption of, the International Financial Reporting Standard with IFRS and their sustainability reporting standards, this ISSB S1 and ISSB S2 as they're called, and that is really about trying to bring more consistency to the market. I know that according to the IFRS' annual report, over 30, I think it's now 35 different jurisdictions, are taking steps to adopt ISSB. It's something certainly at the London Stock Exchange Group as well - we are advocating for the adoption of those standards to really bring a bit more of a common and universal approach to sustainability reporting.
Rosie: So the guidance highlights how the scope of companies covered by sustainability reporting regulations grown over recent years. Can you tell me a little bit about the implications of this?
Claire: Yeah, look, this is true in terms of disclosure requirements today, but also when we think about some of the upcoming disclosure requirements as well.
For example, if you look at the EU's non-Financial Reporting directive, the NFRD, love a good acronym in the world of sustainability reporting.
Rosie: Absolutely.
Claire: It was adopted in 2014 and it only applied to large EU companies with about 500 employees. Then the corporate sustainability reporting directive replaces NFRD currently applies to a much wider group of companies, and it's looking at factors like number of employees, the assets, the listing venue, and the country of operation.
A lot of research that is in the market today really shows that the consequence of this is that the number of companies now covered by sustainability reporting has increased exponentially and also that sort of extra territorial nature of regulation means that many companies are captured, even if they're not domiciled in the reporting jurisdiction.
Therefore, companies really need to be aware of their requirements in the jurisdictions which they're domiciled, but also, where they are listed or where they have, operations as well.
Rosie: The report finds that investors may use sustainability related information to assess companies and subsequently make investment decisions. Why are investors interested in sustainability related information and what sort of information are they looking for?
Claire: Yeah, I think essentially what we're seeing is that sustainability considerations are becoming normal practice in building out institutional investment strategies and how do they price climate risk within that. There was some research that was done by FTSE Russell, a company which is part of the wider LSEG business, and they conduct an annual survey and last year found that over 80% of asset owners with assets under management of over about $10 billion, now implement sustainability considerations in their investment strategies.
If you look at what that number was five years ago, it's up 50%. The same survey actually also showed that investors are paying much more attention to the quality of the data and how data can be built into investment decision making, and also into sort of investment tools and products, so things like ratings and indices as well.
We've seen developments elsewhere in the financial system with banks factoring sustainability considerations into terms in which they lend to companies. So I think this matters not only to investors who are managing their portfolios, but also because they're subject to some of these disclosures themselves in areas like understanding climate change and nature, biodiversity, modern slavery, etc.
They also need to understand this information from the companies to help support their own data and reporting so it's quite sort of a virtuous circle here.
Rosie: Yeah, that sounds great. Then the report also highlights some companies often focus on compliance rather than leveraging the reporting process to drive business value.
How can sustainability reporting drive business value and what are the challenges in realising those benefits?
Claire: I think we've really moved away from sustainability reporting, being seen as, you know, sort of a tick box exercise or a means.
Rosie: Yeah. For its own sake.
Claire: Yeah, exactly. I think, no, it's become so much more than that and actually I think it can genuinely be seen as a strategic asset and that helps to position the company for future growth. So you can see how companies are leveraging the reporting process to improve business processes perhaps, or performance, or how they communicate more effectively with their investors. I think it can be a very powerful catalyst really for helping to accelerate more fundamental business transformation.
You can create trust or new sources of value and unlock more growth as well. So I think if you take the view of looking at the sustainability report more strategically rather than a compliance issue, hopefully what you can do is identify early on gaps where perhaps you might be falling short of targets or it can help you set a clear roadmap for change and take control of your story to stakeholders.
Many companies have set net zero ambitions and targets and they need to ensure that they meet these and they don't run the risk of any greenwashing. So sustainability disclosures really touch every part of a business, from finance to operations, legal, investor relations. It's quite a lot of different stakeholders that really need to be involved in that process to date.
Rosie: It's just great how it just seems to be developing and developing as well. I wanted to ask you about the term materiality and how it impacts both reporting and company strategy.
Claire: Of course, you know, it's a funny old term but I think as it's core, materiality or undergoing a materiality assessment, is really a process that companies really need to go through to help identify and evaluate and prioritise what are the most significant environmental social governance issues for them that impact their stakeholders. What are stakeholders seeing that is really material for the business? Example, what is relevant material for a company operating in the beverage sector like water scarcity. It's going to be very different to a business in a much more energy intensive sector like manufacturing, where the focus there is going to be more on understanding the impact that business has on climate, on energy and emissions. But I think, the insights from these material assessments can then be taken and used by the Boards and executive teams to help guide business strategies that we were talking about before and unlocking value and communication and tell that much more meaningful story around sustainability to stakeholders.
Then of course there's the terms single and double materiality as well, and they're widely used in discussions around materiality. Single materiality is generally used when the focus is exclusively on the financial significance, or the financial materiality of environmental social governance matters.
Then double materiality is generally used when the focus is on both the financial part and the impact materiality of environmental, social governance matters. While single and double materiality often presented as distinct concepts, in practice, there's quite a lot of overlap between them and this is partly the case over longer term horizons, where matters that are identified as impact material may also become financially material in time as well.
Rosie: Okay, now you note the increasing connection of sustainability and financial reporting. Claire, how and why are these becoming more interlinked?
Claire: You are right- they are becoming more interlinked. There is very much as of a growing expectation that companies are starting to apply the same principles of traditional financial reporting to their sustainability disclosures. Various standards and regulations are requiring companies provide those sustainability related disclosures alongside related financial statements.
So some regulations like CSRD specify that these sustainability disclosures should appear in a company's annual management report and then companies are also expected to align their reporting boundaries to those of their financial statements. Now, ultimately, I think these practices are helping investors to use sustainability and financial data more accurately together in their decision making.
But I think there's some challenges that do remain in aligning sustainability reporting with the traditional financial reporting. For example, materiality judgements for sustainability related financial disclosures inevitably they differ from those financial statements as they're likely to consider longer term horizons.
They'll involve interactions across companies' value chains. They might be using different measurement basis as well compared to information that you'd use in financial statements. We might see that as methodologies evolve, companies are more likely to need to issue restatements of sustainability information compared to traditional financial information.
Companies need to consider how that sustainability reporting aligns with their financial reporting. They might think about how they're treating subsidiaries or different contextual analysis, but I think very much a first practical step is how to engage finance teams in the reporting processes.
They're going to be best equipped as well to help apply the principles that you see on traditional finance reporting to sustainability reporting.
Rosie: Now, Guernsey has held a discussion paper with the financial services industry on the future of sustainability reporting including looking at the work of the ISSB, and that obviously aligns with London Stock Exchange group's approach too which is important for Guernsey because we are the number one location for London's Stock Exchange listed funds outside of the UK. How can IFCs, like Guernsey, make best use of guidance from the ISSB, would you say?
Claire: I think investors need globally comparable, useful, sustainable information in order to make informed decisions and to support that allocation of capital in an efficient way and I think financial centres like Guernsey better attract the sustainability focused international investors by aligning with these global standards and best practice. I think the rationale behind SFDR as well is similar. It's about helping investors provide more transparency on the degree to which financial products are considering some of those environmental and social characteristics.
Whilst Guernsey is not part of the EU and therefore not subject to EU legislation, many Guernsey funds are marketed into the EU and therefore will have to comply with SFDR. As you said in London listed markets, we've got a number of sustainability funds listed on our market- I think it's over 25 now. Many of those are Guernsey funds and they are starting to adopt SFDR labels, which is the UK's labelling scheme. Businesses like GreenCo UK Wind has adopted a sustainability focus label, which describes funds with at least 70% invested in assets that are socially or environmentally sustainable.
Then you've got impacts environmental markets and VH Global Energy Infrastructure, both adopting the sustainability impact label. I think it's helpful in terms of the story that these funds can share with investors so that there is that understanding about the environmental or social impact.
Rosie: Yeah, I think that makes perfect sense. It's been great talking with you, Claire. I'm afraid that's all we have time for today. Thank you so much for joining us on the podcast. You can find the link to London Stock Exchange's Sustainability Reporting guidance in the show notes and I'd like to say a big thank you for listening today.
If you'd like to find out more about what Guernsey has to offer, you can visit our website, guernseyfinance.com and if you'd like to hear about Guernsey's success in other financial sectors, you can tune into our sister podcast channel, the Guernsey Finance Podcast. We've also got quite a catalogue of interviews and panel discussions, and you can find those by searching Sustainable Finance Guernsey, wherever you get your podcasts.
If you enjoyed today's episode, leave us a review, a like, a comment. We always love to hear your thoughts and we'll be back soon with another episode of the Sustainable Finance Guernsey podcast. Thanks.