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Morningstar analysis shows US/EU divide on sustainability reporting standards

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Asset managers in the US and EU are broadly aligned on setting up minimum guidelines for climate and sustainability reporting but disagree on specific issues like materiality, emissions disclosures, and international alignment of standards.

  • Morningstar has assessed the responses of 20 large asset managers to consultations by the ISSB on its draft climate and sustainability standards.
  • The comments give insight into the asset managers approach to stewardship, and their approach to incorporating ESG factors in their investment strategies.
  • The responses help Morningstar refine its ESG commitment level ratings, which investors use when selecting investment managers.

In March the International Sustainability Standards Board’s (ISSB) launched consultations on two new draft standards for climate and sustainability disclosures, and invited comments from investors and stakeholders on the matter until end-July.

The responses of the 20 large asset managers assessed by Morningstar manage $40 trillion in assets, and include – 

Abrdn (LSE:ABDN), Allianz Group (GER:ALV), Amundi (PAR:AMUN), Aviva (LON:AV), Blackrock (NYQ:BLK), BNP Paribas (PAR:BNP), Capital Group, Dimensional, DWS (GER:DWS), Fidelity International, Invesco (NYSE:IVZ), Legal and General (LON:LGEN), Northern Trust (NMS:NTRS), PGIM (NYQ:PRU), Schroders (LON:SDRL), State Street (NYQ:STT), T. Rowe Price (NMS:TROW), UBS (SW:UBSG), Vanguard and Wellington.

Broad consensus for consistent disclosures and establishing baseline

The twenty asset managers (AMs) analysed by Morningstar all broadly agreed on the need for clear and consistent climate and sustainability reporting standards, including establishing a global baseline defining a minimum standard of reporting requirements.

Establishing international consistency on climate and sustainability reporting will help provide both companies and investors with better information on making investment decisions, and informing them of related risks and opportunities.

Another reason for supporting a global baseline was to remove the confusion and fragmentation caused by regional standards, which was creating confusion for investors, and contributing to the anti-ESG investing sentiment.

Morningstar’s own response to the ISSB acknowledged the importance of globally convergent standards, but it did point to differences relative to materiality, greenhouse gas emissions disclosures, and alignment among different international standards.

Disagreement over materiality 

The ISSB proposed the disclosure of material information of all the significant risks and opportunities related to sustainability that would form part of general purpose financial reporting and be used to derive an entity’s enterprise value.

The main items that affect the enterprise value calculation would include the timing, amount and probability of short- and long-term cash flows, cost of capital, the entity’s risk profile and access to capital.

A further explanation of materiality was provided as affecting the decision making of the primary users of the information, especially if the omission, misstatement or obscuring of the information could affect determining the enterprise value.

This requirement caused a separation of respondents into those that agreed on a financial or single materiality, those that preferred flexibility by aligning with varying definitions based on the jurisdiction, and those in favour of double materiality.

AMs calling for double materiality were mostly European, and saw it as a way to develop a less fragmented international standard, pointing out that large diverse corporations could do significant harm without financial materiality.

Morningstar’s response to the ISSB pointed out that double materiality will become a requirement based on the EU’s sustainability related financial disclosure rules (SFDR) rules starting in 2023, and asked them to consider dynamic materiality as well.

Scope 3 measurement creates division on emissions disclosure

While a majority of the twenty AMs were open to mandatory disclosure of Scope 1 and Scope 2 emissions, only eight agreed with the ISSB that Scope 3 emissions reporting should be required as well.

Of the remainder, seven preferred limited or deferred disclosures on Scope 3, arguing it should only be reported where material, or until such time as reliable measurement methods were available.

Only one AM (Dimensional) thought that greenhouse gas emissions disclosure should only be required if considered material, with a further caveat that Scope 3 should not be required even when material, owing to the unreliability of its measurement. 

Aligning global reporting standards

While the call for alleviating the confusion over disparate standards was widespread, there were differing views on how this was to be achieved. Some saw combining existing standards as a solution, while others thought collaboration with local regulations was called for.

The broadest support was for the ISSB’s draft standards to be aligned with those set by the task force on climate-related financial disclosures (TCFD) and the sustainability accounting standards board (SASB).

Calls for aligning with local regulations specifically mentioned the SEC and European regulators, which highlights the divergence in approaches between the two sides across the Atlantic.

The different views represented by the responses of the twenty large AMs may reflect their approach to investing using ESG metrics, and also inform Morningstar’s ESG commitment level ratings. 

However, nothing will speak louder than investor preferences for a greater sustainability slant in their portfolios, and the long term performance of their investments.


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