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Lindsey Hall: I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1. 

Esther Whieldon: And I'm Esther Whieldon, a senior writer on the Sustainable1 Thought Leadership Team.

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and governance issues that are shaping investor activity and company strategy. 

Regulation is playing a defining role in the world of ESG investing. The sustainability landscape is constantly evolving, and we're seeing accelerating moves to create standards and rules that provide a framework for ESG investment. 

Esther Whieldon: We've been looking closely at the impact of regulation on ESG in previous podcasts. And one area of the world where there's been a lot of movement in that respect is in the European Union. 

Lindsey Hall: In 2021, the EU’s executive arm, which is the European Commission, asked a body called EFRAG to develop proposals for new regulation on sustainability reporting. Now EFRAG for our listeners keeping tabs on all these ESG acronyms is the European Financial Reporting Advisory Group, and it advises the EU on the use of accounting standards within the block. We'll include a link in our show notes to the episode of this podcast, where we interviewed EFRAG’s CEO on this topic. 

For today's episode, we wanted to understand how these rules have continued to evolve and how they're impacting investors. So today, we're bringing on regular contributor to Jennifer Laidlaw, our colleague on the thought leadership team at S&P Global Sustainable1 and our resident expert on EU regulation. Jen, thanks for joining us. What's the news on this particular regulation?

Jennifer Laidlaw: Well, that's a very timely question, in fact. In June 2022, the European Parliament and the governments of the EU's 27 member states reached an agreement on new sustainability reporting rules for companies. The rules are known as the Corporate Sustainability Reporting Directive, or CSRD. The European Commission proposed the CSRD in April 2021 as a reform of the EU's nonfinancial reporting Directive, or NFRD. NFRD regulation was introduced in 2014, requiring large companies to report on environmental and social issues.

Lindsey Hall: And just making sure I'm following along with our acronyms here, NFRD is the old, CSRD is the new?

Jennifer Laidlaw: Yes, that's right. It's a real alphabet soup. The CSRD will impact a much larger pool of companies and will introduce more detailed reporting requirements for large companies on sustainability issues such as environmental, social, human rights as well as governance criteria. There's still some work to be done though. EFRAG is currently holding a consultation on its first set of sustainability standards that companies will have to comply with under the CSRD. That consultation closes in August, and EFRAG must send a draft to the European Commission by November 2022. 

Esther Whieldon: So Jen, how are investors looking at the reform? And how might it affect their investment decisions?

Jennifer Laidlaw: To answer this question, I turn Adrie Heinsbroek, Adrie is Chief Sustainability Officer at Netherlands-based asset manager NN Investment Partners, which was recently acquired by Goldman Sachs. In the interview, you'll hear Adrie refer to a couple of sustainability frameworks by their acronyms. The TNFD is the Task Force on Nature-Related Financial Disclosures. And the TCFD is the Task Force on Climate-Related Financial Disclosures. You'll also hear him make reference to the sorting hat from Harry Potter to explain the trajectory of ESG regulation. Now that's the first for me. Okay, now from my interview. I started by asking Adrie what the implications of the new directive were for investors.

Adrie Heinsbroek: My first thought would be that the CSRD by itself is an improvement of already existing regulation. And that sounds a bit boring, but the importance of it is that really now investors can take a look out or can await relevant information, more information and also from more companies in which they might be able to invest. Because based on all the other regulation and the interest in sustainability and the importance because let's face it, Jennifer, it's not just because there's regulation investors do want to shift capital to more sustainability. And that's the second thing, which is important. This type of regulation, the CSRD can help investors to really put their money to work in more sustainability because they can make better informed decisions because there's more relevant information available for investors to base their investment decisions on.

Jennifer Laidlaw: So you mentioned this is actually a form of existing legislation and there's going to be more relevant information for investors. Could you just maybe detail what that information is going to be for investors and why it's important to have additional information.

Adrie Heinsbroek: A very complex question, Jennifer, thanks for asking. What is so important on what you just asked and what is the real difference is that it will make sure that investors, which are not all alike and looking at sustainability on the same way, that this can help them figuring out from their own perspective, what is the type of information we need. And in the past, you had to reach out to many companies, ‘please provide me with this and that.’ And now this type of information is probably being reported. All companies are much more willing, much more aware, much more responsive of collecting that information because they know this is something that is useful, important for them, but also something that is being requested.

Jennifer Laidlaw: Do you feel that having this regulation is going to answer the data challenge that so many people in ESG investment have been facing?

Adrie Heinsbroek: I love your question. I do think that indeed some investors will be extremely relieved by the fact that data will become available. But honestly, and don't get me wrong on this, but we, from an investment point is we already made sure we got a lot of information, a lot of data available. But the beauty is, which is a bit of a strange thing to say, but what is good of the regulation and the CSRD is that probably we -- the companies that are more reluctant, which didn't disclose or might also become important for us, will also share this data points, so we are better able to compare. And the other thing is that we will also make sure that by having this data available, maybe we can find some interesting correlations or interesting connections of this data points. So this data abundancy might also trigger people looking at it more closely because the moment you have a lot of data available, maybe people become a bit more selective in which that they might need. And I do think that's also a good thing because I'd rather have 20 data points which are exactly what I'm looking for instead of 100, which gives me a bit of an idea because with investing, it's not about ideas, it's about making better informed decisions.

Jennifer Laidlaw: Do you think that we need like regulation to kind of solve that data challenge? Or do you think it would be done by the market itself?

Adrie Heinsbroek: Well, unfortunately, we need maybe this regulation to really, really get things head started. So -- of course, you have this commercial data vendors and research companies, which is good. But also, it's good that these data vendors also have a lot of information available which they can use and reuse and remodel into their systems. And I do think that the regulation can help really convince the whole market and all market participants, and this is important. So the idea behind it, I fully support. We fully support the fact that look, sustainability data is as important and as necessary as any financial data, which is also regulated. So, for me, finally, a level playing field after 25 years in sustainable investing, finally, we're there. So well done.

Jennifer Laidlaw: In the CSRD, we have the idea of double materiality so looking across a whole company, not just the finances. I mean how important is that for you when you make your investment decisions?

Adrie Heinsbroek: Honestly, Jennifer, one of the cornerstones of how we look at our investment process and are making our investment decisions because it is all about how companies create value. But it's also about how companies maybe even have impact on the outside world. So it's not only the profit that the company is making, but also how is this profit being made by a company, that is extremely important for a responsible investor. So this data might maybe even help us also to see on the impact. For an example, let's say, water quality. So it's good that they finally companies are maybe more reporting on what kind of things they emit on water or on air quality. What type of ingredients that may be used in making some of their products about supply chains. So they also need to report on maybe worker safety and which it was, of course, reported but maybe much more in depth or workers health. So a lot of these important things, so the execution of the business issues and the business strategy is now also becoming much more into the open. And I think that is also better. And double materiality is really important because it showcases how we, as investors, can sort out which type of company is both good for financial value, but also societal value. And maybe Jennifer, it will become a bit like the sorting hat of Harry Potter. I mean, at the end, things come into that and it sort itself out to the type of investors that are looking for it. And I think the CSRD is helping to make sure that a lot of information in the shorting hat gets much more twisted and combined, and then it can find its way to the investors who really are waiting for it and can use it or maybe by itself, get already in the right direction.

Jennifer Laidlaw: With regards to the CSRD, there is draft standards that have been published by EFRAG, which is basically the organization that has put the CSRD together. And how do you think that might help disclosure?

Adrie Heinsbroek: Well, actually, I think the EFRAG is indeed helping that a bit because it prescribes a bit on what level of detail. It is important that I hope EFRAG is much more aware of maybe the needs of people in the financial markets and also on companies that compared to maybe some other regulations, they will not be over asking, but EFRAG maybe hopes. So I hope that it will make sure that the relevant stuff is there, not too much what we really use instead of the abundance. So it is about how to report and whatever is making in there still sort of consultations in their first way of looking at things. So that is important. And I also have the idea that with EFRAG because there are some practitioners involved in it, that it will be really relevant and also connected to the reality in which both companies, corporates and investors work.

Jennifer Laidlaw: Okay. And this information is going to be audited, how easy is it going to be to audit this information?

Adrie Heinsbroek: Not easy, Jennifer. That would be my first thought. I'm not an expert. I'm not an auditor. But it is good that -- and I think that's something where we all can make much more steps than we did -- that the way the level of sustainability information is being audited is less rigid than financial information on the current state of data. And I do hope that this the CSRD also under the EFRAG recommendations that it all will become much more prevalent and more, actually, a sort of new default that this type of information, the ESG information is also being audited much more. Is it easy? No, I don't think so, because it's also a bit about context. And it is about building up experience. It's a bit new. Things need maybe some time before things are done. But many companies, especially the front runners have experience already with auditing this type of information, but let's make sure it gets better. And the beauty is that also you see from all kinds of auditors already very much involved in this and already looking at it. And I think that's the good thing that all actors in the financial markets are really taking a closer look and are really gearing up to make it happen. Let's hope it will be much more audited.

Jennifer Laidlaw: We have a lot of frameworks and standards out there. We have a lot of regulation coming in from the EU. Is there a danger that there's too many reporting rules and frameworks out there?

Adrie Heinsbroek: Well, Jennifer, I would not call it a direct danger, but we have to be careful. I do believe, by the way, that for instance, the dedicated TCFD or what we're also going to have is TNFD, -- so the more on the nature of financial disclosures that, that helps getting attention to those topics that needs more attention. So what my hope is and what I actually expect is that maybe for the next couple of years, we need TCFD. We need the TNFD. But then if it's more accepted and also become maybe more done already by itself in the regular reporting by corporates that these things will you slowly slide away. You're seeing this with CDP, it used to be just the carbon disclosure project. Now it's much more about climate and other things. It is now standardized and also reused for other purposes and still an important measure also for investors. So let's see. Do I feel there are too many -- not yet, but we have to be careful that we're not getting swamped.

Jennifer Laidlaw: Is it more important for you in your role as an investor to have like actual regulation? Or do you prefer to have frameworks that are not rules, per se, but they kind of guide you in making your investment decisions?

Adrie Heinsbroek: That's quite a difficult question. And actually, I tend -- and that's -- now it's getting not that easy to answer, well, my view, much more my personal view as Chief Sustainability Officer, I like the latter, much more in the guidance, much more the frameworks. Because what I also would like to see is that if companies feel they are obliged to, they just do this and provide me a number. What I would really like to see that corporates and investors take this full heartedly and really get to work with it because if they feel forced to deal with it, maybe sometimes less passionate than if people really believe they're going to do it. So then you can have much more sort of -- you see the difference in those investors that really take this on and really feel that is the way forward instead of the ones that let's do it all because we just have to. So my preference would be much more on guidance. I think you also sometimes have more meaningful conversations. On the other hand, I look like a politician now, it's good that now everybody is reporting because they were, in my view, not enough corporates really for hardly disclosing everything that we thought is meaningful. So this will probably speed up the process, but I do hope that the regulation will become obsolete on a certain moment in the next couple of years. Maybe wishful thinking, but it would be in my preference. It should become just part of the ecosystem, which we operate in. And then things will be maybe not easier, but at least it's more clear. And it feels like something maybe more committed, and that also gives the information to you the investor, but also as a corporate, you can showcase to the outside world. Look, this is what we really want and not just because we have to.

Jennifer Laidlaw: There are more companies going to be impacted by this legislation. How might that change the way you invest?

Adrie Heinsbroek: Yes. Good question again. I do not think directly that will change the way how we invest. But it makes the investment universe maybe larger or more diverse because I think more companies are obliged then to report also the smaller ones. Yes, not on all numbers, but they also create information or come to the conclusion, let's make it happen. Let's inform people. So it will bring more companies on a rather more corporates. And that might lead to maybe maybe some new ideas or new initiatives or it will also showcase that maybe some companies actually are much more progressing on this topic than before because now they're really disclosing the information before that they had the information, but what we're not fully aware how important this type of information is. We see that with sometimes small and mid capital companies that they do fantastically on corporate governance. They have fantastically policies, but also practice on how to take care of their employees and their supply chains. But I just feel that's common sense. So why should I report it? Why should I inform you first? Because this is just how we -- and if that's now finally in the open, suddenly, this might be -- so let's see it from the positive side, more diverse company investment for universes and probably more companies on radars of investors.

Jennifer Laidlaw: Is your investment strategy basically more in terms of engagement with the company or divestment?

Adrie Heinsbroek: Much more on engagement. We have what we call an engagement-led divestment. So really, it's all about trying to engage with change. Let's discuss with companies if we feel something is a concern, but we also give complements. So exclusion, restriction, divestment is a lender of last resort. That's not something -- but it should be part of your toolbox because it is about making clear to the market that there's a sort of minimum or certain things that you don't want to put your money to work in society. There are things that we do not want to finance and do not want to invest in. So it's a combination. It's a combination. There are things which I'm really proud of that we have set some bars and some clear stances, but it's all about inclusion because companies can move in the right direction. Maybe they need a bit nudging or maybe they need a bit firm words or convincing because that's where it goes to and because we need almost all corporates and almost all things to really make the transition to a more sustainable society.

Jennifer Laidlaw: Is the CSRD having any influence on your engagement strategy?

Adrie Heinsbroek: Well, actually, maybe it makes us a bit easier, I have to say, I like your question a lot because mostly now many of our questions are, please provide us this information. Please disclose. And I guess some information will already been disclosed by the CSRD, -- so that will make our conversation maybe easier or shorter. And I'm not trying to make a funny remark here, but I do think that -- also having more information will also help us preparing much more in-depth conversation to engagement because engagement is -- it looks like there's always about a fight. No, sometimes it's a meaningful conversation with the company. Could you clarify a bit more. And if you have the data, you can get maybe more faster into the depth. So I do hope that the information provided based on the CSRD in not next year, but in the next 2, 3 years, will help us also have maybe some more in depth, more maybe even also based by corporates, they see that we are really rather information and going to make it useful and have also the conversation around it. So I do hope that's one of the very much positive side effects, which people do not really think about now. So great question, Jennifer.

Esther Whieldon: I'd liked hearing what Andrie had to say on the question of engagement versus divestment. This whole idea of nudging companies is in the right direction and that divestment is a last resort. That's definitely something we've been talking a lot about on this podcast in previous episodes.

Jennifer Laidlaw: Yes, indeed. And it was interesting to hear that the CSRD might make those engagement conversations easier because it will help investors to have more in-depth conversations with companies.

Lindsey Hall: So when exactly will companies have to start complying with this new regulation?

Jennifer Laidlaw: The rules will be effective from January of 2024 for companies already subject to the NFRD. The year after that, companies that don't already report under the NFRD, will have to start reporting. And then the year after that listed small- and medium-sized businesses will have to report.

Esther Whieldon: Great. Well, keep us in touch with any new developments and how this new regulation will impact ESG investing going forward, Jen?

Jennifer Laidlaw: I definitely will. 

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider and a special thanks to our producer, Kyle Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next time.

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