02 Oct Jonanthan Cartu Says: In the soup – The proliferation of sustainability accountin…
NOWHERE IS CORPORATE do-goodery more on show than in a firm’s sustainability report. Today 58% of companies in America’s S&P 500 index publish one, up from 37% in 2011, according to Datamaran, a software provider. Among the photos of blooming flowers and smiling children, firms sneak in environmental, social and governance (ESG) data, such as their carbon footprint or the share of women on boards. But the information differs wildly from firm to firm.
The Reporting Exchange, a website that helps corporations disclose sustainability data, tracks various ESG-related guidelines, such as regulations and standards. Across the world the number grew from around 700 in 2009 to more than 1,700 in 2019. That includes more than 360 different ESG accounting standards.
Some observers, then, may have rolled their eyes on September 22nd when the World Economic Forum (WEF) announced—with the backing of the big four accounting firms, Deloitte, EY, KPMG and PwC—a new set of ESG metrics for firms to report. Those involved are at pains to stress that this is not yet another new standard, but instead a collection of useful measures picked from other standards. The intention, they claim, is to simplify ESG reporting, not to add to the confusion.
Simplification is sorely needed. Investors complain that the proliferation of standards hinders comparability. Environmental activists note that it lets companies cherry-pick flattering results. And corporate bosses moan that they do not know what to disclose and that the array of options is confusing. Many want an ESG equivalent to the Generally Accepted Accounting Principles used in financial reporting. But these took years to agree on. Today, says the boss of a big pension fund with a large ESG portfolio, “there is greater urgency” to coalesce around a set of common standards. Even so, this is expected to take at least five to ten years, slowed by competing interests and disagreements about what to measure.
Four standards dominate ESG’s alphabet soup. The Global Reporting Initiative (GRI) focuses on metrics that show the impact of firms on society and the planet. By contrast, the Sustainability Accounting Standards Board (SASB) includes only ESG factors that have a material effect on a firm’s performance. The Task Force on Climate-related Financial Disclosures (TCFD) and the Carbon Disclosure Project (CDP) are chiefly concerned with climate change—specifically companies’ exposure to its physical effects and to potential regulations to curb carbon emissions.
GRI is the most popular of these, in part because it is the oldest, founded in 1997. It has been embraced by perhaps 6,000 firms worldwide. According to Datamaran, 40% of S&P 500 companies cite GRI in their sustainability reports. But SASB is gaining ground in America. One in four members of the S&P 500 makes reference to it, up from one in 20 two years ago. TCFD has experienced a similar uptick. It is backed by the Financial Stability Board, a global group of regulators. Both SASB and TCFD have risen partly thanks to support from large asset managers, including BlackRock and State Street.
Further simplification may be afoot. In September five big standard-setters announced that they would try to co-operate more and harmonise some measures. But few observers expect the end result to be a single standard. Among the five are SASB and GRI, each of which claims that it could coexist with the other.
How long such coexistence can last is unclear. As well as the WEF, other global bodies are taking an interest. The International Financial Reporting Standards Foundation, a global financial-accounting standard-setter, is considering its own ESG standard. Moreover, the EU is planning rules that will force big companies to disclose more ESG information; it is still thinking about which measures to use. If the ESG standard-setters cannot decide which metrics matter most, others may decide for them. ■
This article appeared in the Business section of the print edition under the headline “In the soup”