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ANALYSIS: ESG Frameworks, Big 4, WEF Push for Integrated Reports

Oct. 6, 2020, 5:48 PM

Most companies agree that they should be disclosing sustainability information, but they desperately need clarity on how to do so. Recently, a pair of ambitious plans laid out by the International Business Council (IBC) of the World Economic Forum (WEF) and five of the most prominent ESG standards-setters are answering the call.

On Sept. 22, the IBC released a report, “Measuring Stakeholder Capitalism Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.” Shortly before on Sept. 11, standards-setters CDP, CDSB, GRI, IIRC, and SASB released a joint “Statement of Intent to Work Together Towards Comprehensive Corporate Reporting.”

As I recently wrote, there has been a long-seeded but quickly growing trend towards collaboration among ESG stakeholders. That trend, in conjunction with these two documents, represents a significant step toward creating a singular and cohesive corporate reporting and disclosure paradigm for ESG and sustainability information.

Four Pillars and 55 Metrics

The IBC standards, developed by a task force of representatives from the Big Four accounting firms (Deloitte, EY, KPMG, and PwC), the World Economic Forum, and Bank of America, establish 21 core metrics. These are generally quantitative, and most companies are already collecting this information. The IBC standards also include 34 expanded metrics, which are less mainstream and have a wider value chain scope.

The standards designate four pillars: principles of governance, planet, people, and prosperity. They are derived from the United Nations Sustainable Development Goals (UN SDGs), and they facilitate integration of the standards into the mainstream, periodic corporate filings of companies across industry sectors and countries. The IBC standards leverage many existing frameworks — for instance, those developed by CDSB, GRI, SASB, TCFD, and many others — and will consistently track progress toward the UN SDGs.

The IBC report intends for these “stakeholder capitalism metrics” to be adopted by IBC member companies. Ideally, this will create a domino effect of sustainability disclosure in the global marketplace, with IBC member companies being the first to fall in line.

A ‘Nested Environment’ of Reporting Frameworks

The joint statement from CDP, CDSB, GRI, IIRC, and SASB reflects the mounting impetus on standards-setters to find better alignment among their own standards and frameworks. It also echoes the continued chorus of companies and investors calling for more clarity among the “alphabet soup” of reporting frameworks.

The joint statement, characterized as a “summary of alignment discussions” and developed in consultation with Deloitte, envisions each of the participating standards-setters as existing in a “nested environment.” This perspective seats SASB and CDSB as facilitators of the disclosure of financially material sustainability information in mainstream financial reports, while CDP and GRI capture information that is relevant beyond the periodic reporting context, extending to the broader economic, environmental, and social impacts caused by business organizations. Rounding out this nest, the role of IIRC is to inform and establish a nexus between these two reporting paradigms to create a singular, integrated reporting process.

The statement promises forthcoming guidance that will help companies fully leverage each of the frameworks. Acknowledging the existence of widespread market confusion, the statement also attempts to provide clarity by explaining how the participating standards-setters fit together — something that previously was largely left for companies to do on their own.

Dynamic Materiality and Stakeholder Capitalism

Two concepts frequently referenced in both the IBC standards and the joint statement are dynamic materiality and stakeholder capitalism.

Dynamic materiality refers to the principle that certain information may not currently pass a materiality test, as applied under U.S. securities laws, but may at a future time.

Stakeholder capitalism refers to the purpose of a corporation — specifically, to the concept that this purpose is to benefit all of its different stakeholders, not just shareholders. “Stakeholderism” was significantly boosted last year by the Business Roundtable’s statement on corporate purpose, and it has the potential to permanently overtake shareholder primacy as the settled purpose of a corporation. The debate is by no means over (will it ever be?), but the Covid-19 pandemic has certainly catalyzed and strengthened a stakeholder-centric view.

These two principles, coupled with the potential market solidification around a singular sustainability reporting paradigm as the IBC and standards-setters promise, could make 2020 the year that shepherded universal — and eventually mandatory — sustainability disclosure into the mainstream of corporate reporting.

In other words, dynamic materiality is potentially playing out in front of us, carrying major implications for companies and their stakeholders. Remembering that mainstream materiality stems from the perspective of the “reasonable investor,” it is notable that the Council of Institutional Investors completed a policy statement supporting the role of independent, private-sector standard-setters in shaping the metrics for ESG reporting, and published it the day after the final version of the IBC standards were released.

Answering the Call

The corporate marketplace is emanating what can be described as a clarion call for globally applicable sustainability standards, and other major stakeholders are answering as well. Just a week after the IBC standards were released, the International Financial Reporting Standards Foundation (IFRS) Sept. 30 published its own “Consultation Paper on Sustainability Reporting,” which sets out to determine what stakeholders want from sustainability reporting and what role the IFRS might play in responding to that demand. The IFRS statement was produced by a task force established in October 2019.

The five standards-setters were eager to respond with an open letter to the IFRS on the same day. The letter essentially answers the question presented by the IFRS by offering to help form a complementary standardized system together, using the standards and frameworks they’ve already created.

Collaboration Is Key

The IBC standards report admits that its role is not to reinvent the wheel by developing new standards and metrics from scratch — which is why they’ve been constructed from the building blocks already created by the standards-setters. And the standards-setters, in their joint statement, admit that they need to work collaboratively, both with the private sector and among themselves, to simplify their standards if widespread sustainability disclosure is going to become the norm.

But there are still many “maybes,” including the challenges of widespread adoption by IBC member companies and the broader market, successful coordination among standards-setters toward a cohesive framework (and overcoming the immense technical hurdles that this entails), and establishing comprehensive buy-in from the investment community.

Despite these uncertainties, if the standards-setters, and their promised collaborative framework, successfully reach “the same level of maturity that the financial reporting eco-system has achieved via IFRS and US GAAP,” which is the stated objective, and are able to dovetail with the IBC standards to form one cohesive reporting system, this could be a turning point for companies, stakeholders, and the global marketplace.

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