Corporate social responsibility. Socially responsible investing. Environmental, social and governance (ESG) integration. Sustainable investing. These phrases refer to the need for investors to pay more attention to the environmental and social impacts of the businesses in which they invest.
The growing importance of this field is evident in the creation of the [ISSB] to establish uniform social and environmental disclosure standards that companies around the world will use to report to investors. But the current ISSB structure omits a category of information that is very important to investors: the costs that companies externalize to the economy and that affect overall securities market returns (“beta”), and thus the returns of other companies in an investor’s portfolio.
The current plan for the ISSB only includes information that implicates a single issue: future cash flows from the company to investors that provide the value of the enterprise (often called “financial materiality.”) The ISSB documentation expressly rejects “double materiality,” which couples financial materiality with information relevant to the impact companies have on civil society and stakeholders other than investors. The ISSB documentation does not address—or even acknowledge—the possibility of providing information that describes the impact companies have on beta, and thus other companies in an investment portfolio. This data might best be described as “sesquimaterial,” because it resides between enterprise-only value and double materiality.
The failure of the ISSB to even address beta-oriented disclosure is surprising because there is a growing recognition of the need for diversified investors to monitor and steward the beta impact of portfolio company activity. The omission seems to be an artifact of the hesitancy of some in the ESG community to acknowledge an uncomfortable economic fact: that the best financial outcome for a company is not always the best financial outcome for its diversified shareholders.
The final documentation of the ISSB standards should acknowledge that most investors have significant, largely uniform interests in beta impacts. The law governing investment fiduciaries is evolving to make it clear that fiduciary obligations permit—or even require—beta management. This is a critically important public policy development, not simply because it will improve investment returns, but because it will lead to better social and environmental outcomes on the ground, as many of the most serious threats to beta are also the most serious threats to people and the planet on which we live. At a time when regulation alone seems increasingly inadequate to the task of addressing threats to the environment and our social fabric, an apparent retreat from a market-based solution in a document as influential as the ISSB standards would be a serious setback.