Course Spotlight - AC200: Sustainability Reporting in Capital Markets

In this interview, Dr Julia Morley and Dr Xi Li, who teach on AC200: Sustainability Reporting in Capital Markets, explain the importance of ESG reporting, as well as the benefits and challenges it entails for corporations and investors. They also discuss the ways in which students on their course will interact with case studies, cutting-edge research and guest speakers to fully understand sustainability reporting, as well as its relevance in today’s society. 

 

What are sustainability disclosures?

Sustainability disclosures refer to companies’ reporting of environmental, social and governance (ESG) performance and impact. By making ESG disclosures, companies provide information about the management of their social and environmental impact such as carbon emissions, diversity and inclusion policies, and human rights practices. Some disclosures are required by law and others are made voluntarily. The course will explore the kinds of disclosures made by companies and evaluate their usefulness for different stakeholders. This is an important and rapidly changing field which requires in-depth knowledge and has attracted the attention of a wide range of people. It is most relevant, however, to those interested in management, investment, policymaking, and assurance.

Why do companies bother making voluntary ESG disclosures – surely it is very costly?

Most large companies devote significant resources now to measuring and disclosing their ESG impact, often going beyond what is required by law. Consistent with our intuitions about corporate motivations, the academic literature suggests that companies will spend resources on these disclosures only if this is beneficial for them. So, what are the benefits? The main benefit of voluntary ESG disclosures is that they enhance the company’s reputation by demonstrating its commitment to socially and environmentally ethical practices. Such commitments may be viewed as important by customers, suppliers and – very importantly - investors. ESG disclosures enable companies to be evaluated by ESG ratings agencies, and these ratings are increasingly important in enabling companies to attract investment.

Do investors care about ESG?

Yes, in recent years, more and more investors, especially institutional investors, consider ESG factors when making investment decisions. AC200: Sustainability Reporting in Capital Markets introduces the concept of responsible/ESG/impact investing and current trends in the asset management industry. The course will then cover the concept of Willingness-to-Pay (WTP) and Greenium, financial measures designed to gauge the monetary value of positive environmental and social impact. During classes, there will be the opportunity to participate in mini experiments aimed at measuring WTP for green projects. Lastly, the course will introduce the latest academic evidence on ESG investment.

How do investors show that they care about ESG?

Investors use Exit and Voice as two main tools to influence investee firms’ ESG performance. There are various responsible investment strategies, such as proxy voting, shareholder engagement, and divesting, all with different costs and benefits. In classes, the latest academic evidence on the effectiveness of various ESG investment strategies will be presented and discussed.

Can we trust ESG disclosures? Is there Greenwashing?

The reliability of ESG disclosures will depend on various factors. Some companies may engage in “greenwashing” or “diversity washing” where firms exaggerate or even fabricate their positive environmental or social impact. Investors might also engage in greenwashing by making misleading claims about the sustainability characteristics of their investment products. In response to fears over such greenwashing, regulators have increasingly tightened the rules on firms’ and asset managers’ ESG claims. Nevertheless, ESG disclosures are still viewed as being less reliable than traditional financial reporting disclosures. The reasons for this will be explored in classes and students will consider what can be done to improve the quality of ESG disclosures. As part of this exercise, the course will include a deep dive into the disclosures made recently by high-profile companies and will focus on practical knowledge of the typical format and content of ESG disclosures.

Is the course technical or practical?

The course is very practical. It will focus on examples of ESG disclosures to enable students to master the academic and regulatory material covered on the course. We will also use various case studies to understand real-life problems. There will also be the opportunity to hear from guest speakers currently working in ESG industries and learn about their views and experience of ESG. The class is very interactive. There will be plenty of opportunities to work in groups discussing and debating a variety of issues. Students can use online polling software to participate in class discussions actively. In one session, students will “pitch” their business proposals to social impact investors (their peers) in a “Dragons’ Den” format. They will justify their claims about their social impact using the kinds of social and environmental impact disclosures covered in the course. This is a fun session which gives the students practical experience of ESG disclosures and allows them to refine their presentation skills.