The Rising Need for ESG Disclosure and Transparency

1. ESG Consulting Services WHITEPAPER The Rising Need for ESG Disclosure and Transparency

2. The Rising Need for ESG Disclosure and Transparency ESG elements have emerged as a critical component in investors’ decision-making processes and are essential to comprehend a company’s comprehensive, long-term plan. Investors acknowledge that public or private businesses cannot be evaluated only based on financial performance. There is a new requirement for precise, thorough, and dependable progress reporting to acquire. The challenge is that despite the efforts to increase ESG disclosures, there needs to be more governance and uniformity among rating agencies and a range of data, control, and metric maturity levels. Additionally, with few norms and regulations in place, it is up to enterprises to decide how best to meet the changing needs of stakeholders and investors. Highlights • Investors find it challenging to establish meaningful comparisons due to the current patchwork of primarily voluntary ESG disclosure regulations, which restrains the market. More effective obligatory regulations are being proposed by the U.S., the EU, Spain, Italy, Canada, Malaysia, and Japan , and efforts are being made to establish a worldwide set of standard-ESG regulations . ESG disclosure is still in its early stages. Companies need to understand the long-term benefits that ESG disclosure offers, and they should collaborate with ESG professionals to promote ESG transparency. No longer is the question of whether environmental, social, and governance (ESG) action is required, but rather how to take an ESG action . Although the topic has been discussed for some time now, recent socioeconomic and geopolitical concerns, such as the COVID-19 outbreak, social movements, and climate change, have been swiftly elevating ESG to the top of business and economic agendas. • • • As ESG Funds See Record Investment, Investors Need Transparent Reporting 85% of investors believe companies that prioritize ESG initiatives represent better opportunities for long-term returns than companies that do not. 2

3. The Rising Need for ESG Disclosure and Transparency Nowadays, investors are more aware than they were in the past. There is a significant demand for ESG investment and information about a firm’s environmental, financial, and social performance. Companies and portfolio managers are under mounting pressure to offer investment solutions that can satisfy clients’ changing needs due to the inflow of ESG financial products. Clients want to know whether their funds are rightly invested in businesses that profit and conduct operations ethically. They want to put their money into companies that care about ESG concerns. continuation with the sharp increase from $285 billion in 2019 to $542 billion in 2020, shows the Refinitiv Lipper data. Companies are releasing a flood of ESG data as they strive to highlight how sustainable their funds or goods are. However, there are no industry-wide reporting requirements still. With ESG reporting guidelines, comparing investment possibilities is easier. How can investors understand or believe the information provided? One of the main difficulties faced by investors and asset managers has been this. Third-party evaluators assign ESG scores to companies; however, there needs to be more consistency across the various ranking services. To enable sustainable investing, stop greenwashing, and encourage businesses to adopt more sustainable business practices, transparency is required across all markets. A study by Gallop indicates that 48% of investors are now considering sustainable investments. Some estimates put the number at 85% of investors considering ESG factors. There is no doubt that this type of investment is expanding. Through November 30, 2021, a record $649 billion was invested in global ESG funds, which was in Current ESG Reporting Standards ESG Reporting Frameworks Securities and Exchange Commission Corporate Sustainability Reporting Directive Carbon Disclosure Project Sustainability Accounting Standards Board Task Force on Climate-Related Financial Disclosures Global Reporting Initiative International Integrated Reporting Council Carbon Disclosure Standards Board Sustainable Developement Goals 3

4. The Rising Need for ESG Disclosure and Transparency environmental and social issues under Europe’s Non- Financial Reporting Directive (NFRD). Reporting requirements differ between jurisdictions. There are no laws requiring ESG reporting in the U.S. As of now, the U.S. Securities and Exchange Commission (SEC) mandates that publicly traded corporations disclose to investors any information that can be relevant to them, including ESG concerns. The Corporate Sustainability Reporting Directive (CSRD ), which has been adopted and is pending implementation, may shortly cause the directive to be widened. A more comprehensive range of organizations will be required to submit several thorough reports on ESG issues under this new guideline. The SEC has also recommended a regulatory framework disclosing how wealth management professionals promote their ESG investment products and make environmental reporting essential. Although nothing is legally obligatory, plans are underway to introduce ESG uniformity to various parts of businesses based in the U.S. The Sustainable Finance Disclosure Regulation (SFDR), enforced in Europe, obliges investment companies and portfolio managers to provide their customers with ESG information. Large public-interest corporations (those with more than 500 workers) must provide information about Importance of ESG Transparency Even though ESG is becoming increasingly popular, the reporting requirements for ESG measurements are still in their infancy. ESG ratings from agencies differ significantly, making it more straightforward for businesses to discover the ratings that favor them. Thus, stakeholders are wary of conventional ESG disclosures if they need to be supported by more data and reporting. 52% of investors find it challenging to believe in a company’s socially and environmentally responsible business practices. The publication of ESG-relevant indicators by firm, industry, sector, etc., is called ESG transparency. The criteria for ESG transparency reporting must be created to increase the stakeholders’ trust in ESG disclosures. Additionally, businesses are advised to consistently publish sustainability reports and publications, as ESG regulations continue to expand in line with the rise in popularity. This will let the concerned investors know how risk is reduced and how a company produces long- term sustainable financial returns through its operations. If not, investors may decide that these businesses are not suitable for investment since they are potentially too hazardous for their portfolios. Transparency is critical to driving positive outcomes 4

5. The Rising Need for ESG Disclosure and Transparency Lack of Transparency Is a Significant Impediment to Further ESG Adoption “ The IIA found that 63% of respondents cited a need for more quantitative data as a significant or moderate impediment to their adoption of ESG. Furthermore, 64% of asset managers expressed worry over a lack of corporate disclosure and openness regarding companies’ ESG actions. Fundamentally, the poll showed the issues of having different ESG mindsets, with 61% of respondents citing a shortage of relevant indicators as a significant or moderate barrier and 58% lamenting a lack of data standardization. Lastly, 88% of fund and asset managers demanded that ESG be widely used across all asset types. Despite these shortcomings, 84% of respondents stated they had immense faith in index providers to promote ESG innovation and standards in the financial services industry. Similarly, according to 85% of asset managers questioned, ESG is a top priority for their organizations. In their portfolios, the average allocation to ESG is anticipated to increase to 43.6% in five years from 26.7% in one year. With greater transparency will come greater accountability and better corporate behavior. Rather than engage in futile resistance to it, firms should actively embrace transparency and rethink their values, and generally get in better shape. “ According to a survey by the Index Industry Association (IIA), the primary barriers to the continued adoption of ESG initiatives included a lack of transparency and inconsistent definitions and measures. Lack of ESG Transparency Stifles Action by 2050 and 1.5°C temperature increase, respectively. About 43% of them disclose their commitments to reduce emissions, and 30% admit Scope 3 emissions from business travel. Given the extent of criticism, the SEC will probably be forced to scale back its regulatory ambition, keeping corporate America’s commitment to ESG lower than in other areas. U.S. Businesses Fall Short of Regulators’ Ambitions By recommending new climate disclosure guidelines to American-listed corporations, the SEC made headlines in March. Large corporations would be obliged to reveal in their registration reports and annual statements their Scope 1 and 2 GHG emissions, specific financial accounts, and qualitative and governance information. Business Association of Manufacturers, the U.S. Chamber of Commerce, the Bank Policy Institute, and the American Petroleum Institute, have asked the SEC to reduce the mandatory disclosures in response to corporate opposition to the proposed regulation. This response illustrates how far huge U.S. firms are from being transparent about their ESG practices. According to a recent JUST Capital analysis, only 57% of the Russell 1000 Index’s 1,000 most prominent corporations publish their Scope 1 and 2 emissions measured by market capitalization. Only 11% and 7% of them report climate pledges in line with science-based objectives for Net Zero organizations, including the National Stricter ESG Reporting Standards to Take Effect in the EU The NFRD, which took effect in 2018, mandated that big corporations in the EU report on their ESG performance. All public interest businesses with more than 500 workers, a balance sheet above €20 million, or a turnover over €40 million—a total of around 11,700 companies—are subject to the NFRD. Consequently, according to the Climate Disclosure Standards Board, 100% of the businesses included in the NFRD declared their GHG emissions in 5

6. The Rising Need for ESG Disclosure and Transparency 2020, and 74% retained their Scope 3 emissions in the report. The CSRD, a revised version of the NFRD that broadens its scope, is currently being prepared for introduction by the EU. By the time the CSRD is fully implemented in 2026, it is anticipated that 50,000 major and small-scale businesses in Europe will need to comply. According to the EU Green Deal and Green Taxonomy, the new regulations will oblige them to give thorough, audited information on their ESG effects. for mid-sized Spanish and Italian businesses due to a need for more information. According to a press release from Standard Ethics, the publication of the ESG index has been postponed from June to November 2022. This is because Standard Ethics analysts needed more time to correctly and thoroughly analyze the potential components of the index, given the difficulty in locating the required public documentation. Since they are already subject to the NFRD regulations and are compelled to report information about their ESG effect, large corporations in these countries already have sustainability indices. The FTSE4Good IBEX Index in Spain recognizes Spanish firms with strong corporate responsibility practices. Lack of Information Delays the Publishing of ESG Standard in Spain and Italy The U.K. rating company Standard Ethics was forced to postpone its intentions to create a sustainability index Can More Data Solve the ESG Transparency Problem? Effective ESG disclosure fulfills 5 key criteria Standardized Consumable Transparent Timely Accurate More comparable, reliable, and high-quality data is the straightforward solution to the ESG transparency issue. ESG is a complicated environment; therefore, there is no quick fix. Private markets have long been used to having transparency restrictions. Private markets are at a transparency tipping point as General Partners consider ESG risks and possibilities in their investment decision- making, and limited partners feel the pressure from rules and customer expectations. Moving from a goal to reality requires using high-quality, trustworthy ESG data. From our perspective, the more open the sector is to ESG reporting, the more accurate our data and analysis can be throughout the whole lifespan of the private market. According to Preqin’s research, “ESG in Alternatives 2022,” the integration of ESG into private markets is well underway, with 42% of AUM (Assets Under Management) across private capital being managed by funds with an active ESG policy. Understanding the picture of the hitherto opaque private markets requires comparable ESG data. To do it correctly, we must acknowledge the distinctive characteristics of private markets and the lessons learned from ESG in public markets. Quality over quantity is essential to help the industry unite on fundamental KPIs for uniform ESG disclosure. The number of criteria has grown along with the evolution of ESG investment, as has the complexity of reporting. Although there has been a significant change, universal standards and guidelines still need improvement. 6

7. The Rising Need for ESG Disclosure and Transparency Recommended Worldwide Framework for Reporting Transparency Last year, the International Sustainability Standards Board (ISSB) was founded during the COP26 climate change summit in Glasgow, Scotland, to create a global framework for ESG reporting. and rules that closely adhere to the pre-existing frameworks like the SASB standards. The revised ISSB standards are anticipated to be published later this year. The framework won’t be legally enforceable, but it will provide a universal standard to make ESG reporting far more transparent and straightforward for investors and consumers to grasp. The ISSB presented its suggestions earlier this year and requested comments and suggestions on the basic structure. More than 80 chief financial officers (CFOs) produced and signed a statement expressing support for the original framework but also urging modifications. Many comments emphasized the need for precise definitions As more and more capital pours into the sustainable investment industry, standardizing reporting and increasing transparency are necessary. 7

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