ESG-related risk assessment, compliance and disclosure have become core drivers of investment decisions. But ESG information asymmetries between investors and companies are making ESG analysis more complex than it needs to be, especially for smaller companies in emerging markets.
The International Sustainability Standards Board (ISSB) confirmed at the IFRS Sustainability Symposium in Montreal last week that will it issue its first reporting standards in Q2 2023. The framework is looking at establishing a ‘truly global baseline’ of standards that cover both smaller and larger listed entities.
One of the panel sessions at the symposium brought together investors and ESG experts to consider the benefits of the ISSB standards for smaller businesses and emerging economies. It also looked at how the framework will allow capital to flow to those places ‘where it could and should’, but hasn’t done so yet.
Kathlyn Collins, vice president and head of ESG at investment firm Matthews Asia said ISSB standards are crucial to establishing a reporting mechanism that allows investors to get a clear view of how companies tackle sustainability risks, leverage opportunities and create solutions for ESG challenges. ‘Having a standard across emerging markets will help us get some of the data we need,’ she said.
‘If you think about where a lot of the financing is going when it comes to sustainable development goals, [it’s] in emerging markets. But a lot of investors are requiring ESG information on these companies before they feel comfortable enough to put their money to work.’
Collins noted that one of the benefits of the ISSB standards is that they will act as a common framework across countries. ‘We need to collect a lot of data on the portfolio companies we invest in across the board,’ she pointed out. ‘If you have localized reporting frameworks in different countries, that makes it quite difficult.’
A big cog in the wheel
For countries like South Africa, which is the largest capital market on the African continent, the ISSB framework represents an opportunity for businesses to close the communications gap between companies and investors. Panelist noted that Rwanda and South Africa were two of the early adopters of such standards, even before they were published.
Raymond Chamboko, director at corporate reporting advisory firm W.consulting, based in South Africa, said a common sustainability standard is a critical step forward for emerging economies.
When you look at the modern standards currently available, a lot of entrepreneurial-type businesses don’t know where to start,’ he noted. ‘The fact is [that] they’ve got a myriad of standards to look at and are trying to figure out which investors are going to be accepting of which standard. I see the ISSB standards as being a key cog in this wheel, in that they will allow for that common reporting to occur.’
Adoption of ISSB standards will also benefit many small and micro-cap companies in Asia, where more than 95 percent of businesses fall within that market capitalization. For Hui En Joanna Yeo, CEO and founder of Arukah Capital, a blockchain-based credit firm, the framework is equally vital for businesses and investors.
‘The challenge is for the smallest businesses and the small farmers [in some Asian countries],’ Yeo said. ‘[They are] thinking day to day and month to month: what will get [them] a better price when they sell [their] product? What will get them access to credit that gives them the working capital required for them to survive?’
A bigger investable universe
Eliane Ubalijoro, global hub director at Canada Future Earth, said the ISSB framework will help enrich the dataset available to small business owners in Africa. In the long term, data availability will allow owners of small entities to make sustainable decisions that will help their businesses survive.
‘It’s really about knowing that, right now, climate-adaptation mitigation in Africa is severely underfunded,’ she said.
‘The combination of bringing about the needed data and policy frameworks and bringing out the incentives to get more investments coming into the continent is going to be critical because what we know is that [Africa] is going to be 40 percent of the population of the planet by 2050.’
Collins encouraged wider adoption of the ISSB standards and urged regulators to establish support programs for businesses in their reporting. ‘I think there’s a huge opportunity for some of the largest economies within the emerging markets space to adopt the ISSB standards,’ she said. ‘The investable universe for us, for example, is 10,000 listed companies, but there’s only ESG data on about a third of those.
‘We really do need all emerging markets publicly listed companies to start adopting the standard so that we can gather this information. I think [it’s down to] the regulators as well as the [stock] exchanges to put in place programs to get their listed companies to better understand what the reports look like.’