Can we finally standardize ESG standards?

By Tim Mohin

Most GreenBiz readers are well aware of the complex sustainability reporting landscape. It seems like every year new reporting standards or frameworks are added to the overstuffed workload of the corporate sustainability professional.

As the former chief executive of the Global Reporting Initiative (GRI), I had a role in the ongoing movement to “standardize the standards” that companies use to report their sustainability results. I also worked on the corporate side (Intel, Apple and AMD) and have a deep appreciation of the work that goes into these reports.

Over the years, there has been more talk than action on reducing confusion and burden in the reporting space. To be fair, some of the burden is self-inflicted by companies that insist on publishing 100-plus page sustainability reports.

As we enter 2021, there are strong signals of meaningful change in the sustainability reporting world. Three main trends are emerging:

Mandatory disclosure: Policymakers are increasingly requiring ESG disclosure around the world. For example, the European Union (EU) will tighten its “Non-Financial Reporting Directive” in 2021, which requires environmental, social and governance (ESG) disclosure from companies with more than 500 employees doing business in the EU. And it’s likely that the incoming U.S. administration will introduce new ESG mandates as well.
Investor demand: There were record inflows to ESG investment funds in 2020 and the total tops $40 trillion — larger than the entire U.S. economy. Major asset managers such as BlackRock are using their ownership stake to pressure companies to improve their ESG disclosures.
Consolidated ESG standards: Recently, four leading ESG standards organizations — GRI, the Sustainability Accounting Standards Board (SASB); CDP (formerly the Carbon Disclosure Project); the Carbon Disclosure Standards Board (CDSB); and the International Integrated Reporting Council (IIRC) — declared their intent to collaborate. While this is a welcome signal, all of this work could be rendered moot by the International Financial Reporting Standards (IFRS) Foundation’s proposal to develop ESG standards. One hundred twenty countries use the IFRS Standards as the foundation for company financial disclosure, making it more than likely that these countries will endorse and require companies to use the new ESG standards.
The IFRS Foundation received more than 500 comment letters on its sustainability standards proposal with many key stakeholders in support. Given the momentum, the IFRS Foundation seems well-positioned to accomplish the elusive goal of a single global ESG standard

I have stated publicly and will reiterate here that I strongly support the IFRS action. A globally accepted ESG standard will improve the quality and comparability of disclosure, unlocking investment and trade that will improve, rather than ignore, the sustainability needs of society.

But there are several key challenges to address:

1. Materiality: The mission of the IFRS Foundation is “to develop standards that bring transparency, accountability and efficiency to financial markets around the world.” The concerns of financial markets are a subset of the broader concerns of sustainability. The IFRS Foundation must adopt a broader view to create transparency for sustainability issues that may not yet be financially material to companies or investors but are very important from a sustainability lens. Many companies already report on ESG matters beyond the scope of financial materiality and, as we saw in the pandemic, the definition of materiality is fluid and dynamic. It’s crucial that the IFRS articulates a strategy to straddle the boundary of “dual materiality,” enabling transparency on issues important for financial reasons and important to people and the planet.

2. Comparability: Many have criticized the lack of comparability in sustainability disclosures. Sustainability, unlike financial matters, includes a vast array of disparate issues that are not easily compared. An example is reporting on gender diversity vs. greenhouse gas emissions: Both are well within the scope of sustainability reporting, but obviously can be neither compared nor offset. As such factors cannot be reasonably merged into a sustainability score, they must be compared within the boundaries of the topic. The IFRS should emphasize the inherent lack of comparability between disparate ESG issues.

To enhance ESG comparability, the IFRS should consider the concepts in the International Business Council/World Economic Forum report: “Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.” It outlines a series of universal metrics drawn from existing ESG standards. Setting aside the selection of the metrics, universally required disclosures will provide greater consistency of reporting across sectors and thus increase the quality and comparability of reporting.

3. Capabilities: The IFRS’s competency and credibility in the development of globally accepted financial disclosure standards makes them a natural hub for this work. But, because they have little experience with ESG issues, they will need to hire staff with sustainability credentials. And as they develop the standards, the IFRS must engage recognized experts in each respective topic that represent all relevant sectors, geographies and stakeholders. Blending sustainability expertise with the IFRS core competencies will not be easy, but is essential for the success of this proposal.

4. Technology: The sad fact is that the tools for gathering, auditing and reporting sustainability information are poor. The IFRS should incorporate the latest reporting technology into its sustainability standards. Information technology will not only reduce the burden of reporting, it will make it more actionable. Technology also will improve the quality of reporting, thus making it more reliable for investors and stakeholders and thus more effective in driving sustainability benefits.

After 35 years working in this field, it’s rewarding to see the rapid maturation of the sustainability movement. By taking on ESG standards, the IFRS Foundation is forging a path toward a global common language for sustainability. It is also confirming that sustainability has moved into the mainstream of global commerce. In essence, this signals the alignment of capitalism with the needs of people and our planet — and not a moment too soon.

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