To accelerate convergence among the sustainability reporting bodies, the World Economic Forum released a common set of environmental, social, and governance (ESG) metrics earlier this month (22 September).
Born out of widespread frustrations over the plethora of sustainability reporting frameworks in the market, the new ESG framework marks the first step in driving a universal approach for non-financial disclosure.
The initiative is backed by the big four accounting firms—Deloitte, EY, KPMG and PwC—and draws on existing industry standards to form 21 core metrics across the pillars of people, planet, prosperity and governance.
While a universal ESG metric has the potential to simplify the reporting process, some industry observers remain sceptical.
“The reporting space is already crowded. The danger is that this is seen as yet another framework that companies have to wrap their heads around, and the unique value of this one isn’t clear.”
Thomas Milburn, Southeast Asia director, Corporate Citizenship
Thomas Milburn, Southeast Asia director for sustainable business consultancy Corporate Citizenship said that while it is still too early to judge, the effectiveness of the proposed approach and indicators depends on the uptake by companies and investors.
“The reporting space is already crowded. The danger is that this is seen as yet another framework that companies have to wrap their heads around, and the unique value of this one isn’t clear,” Milburn added.
In the short run, John Pabon, founder of Melbourne-based sustainability consultancy Fulcrum Strategic Advisors, anticipates more confusion among end-users.
“I assume it’s going to make the reporting process more scattered than streamlined, because all of these different standard bodies are now introducing their own tweak to the current standards,” he said
The WEF framework comes after an announcement earlier this month by five leading sustainability reporting organisations—CDP, the Climate Disclosure Standards Board (CDSB), Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), and the Sustainability Accounting Standards Board (SASB)—that they would work together towards a comprehensive corporate reporting system.
Need for standard-setters to walk the talk
Despite these initiatives towards harmonising sustainability reporting, the current reality on the ground seems to show otherwise.
“There’s been a lot of talk, but we haven’t seen the main standard-setters change their approach to be more aligned with the others yet,” said Milburn.
The key difficulty in ensuring alignment among standard bodies is the difference in the organisations’ approach to materiality—the sustainability information that a company chooses to disclose that is most relevant to their business.
There are two approaches to choose which environmental and social issues to report: How these issues affect a company’s financial performance, and how a company’s actions on these issues affect society and the environment.
But instead of incorporating both approaches, market leader GRI’s upcoming changes to its standard is doubling down on its current methodology to report on ESG issues that impact society rather than the business itself, said Milburn.
In July, the two leading sustainability standards bodies, GRI and SASB, collaborated to bring clarity to the reporting process and show the key differences between both standards.
“The issue from a company’s perspective is that you’re asking me to disclose information in two different ways. That’s not only more work, but potentially confusing. To drive the transformational change needed, businesses need to understand and report against a set of material topics based on both societal impact and financial materiality,” Milburn said.
Simplifying the reporting process requires changes to standards that reflect the rhetoric around integration.
Back to basics
“We’ve forgotten the point of reports. It’s become a business in and of itself. But the point of reporting is to aid in transparency so that both the company and its stakeholders know what your business is doing and can measure progress” said Pabon.
Moving forward, companies should get back to the basics, Pabon added. “Get back to what’s most important for your business and stakeholders and base your report on that. Get back to the idea of transparency. How do you best create a report that is going to serve the people reading it?”
Beyond WEF’s universal metrics, companies must also consider sector-specific standards.
“The holy grail is a universal set of metrics, supported by sector and company specific metrics. A single source of truth if you will. But I don’t see that happening anytime soon,” said Milburn.
As the Covid-19 pandemic has exemplified the connection between sustainability performance and financial risk and return, companies face increasing pressure to report. But companies must go beyond “ticking the boxes” to help stakeholders fully understand their business and what impact that has for both society and the company’s long-term success, said Milburn.
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