On Corporate Risk Strategy, Sustainable Actions & Outcomes – What’s the Best Ways to Report on ESG to Stakeholders?

April 2021

by Hank Boerner – Chair & Chief Strategist, G&A Institute

Buzz… Buzzz… Buzzzzz! The current buzz among key stakeholders – investors, corporate boards & management, NGOs, government regulators, stock exchanges, ESG raters & rankers, ESG corporate disclosure standards and frameworks managers – is centered on “Quo Vadis”…where do we go from here!

The good news is that the lively discussions underway appear to be indicating progress in the global drive to achieve more holistic, meaningful, accurate, comparable, understandable corporate ESG disclosure approaches.

One, to help publicly-traded company managements understand and provide transparency for the data sets, metrics and narratives that asset owners and their managers, and (2) to help creators of sustainable investing products in their expanding analysis of companies of all market cap sizes.

Influential players are part of the discussion.

Example: The World Economic Forum (WEF) published a White Paper in January 2020 to set out a framework to bring sustainable reporting frameworks & standards into a common and consistent system of metrics. This, to help investors and companies attain sustainable value creation and accurately disclose on same. WEF suggests a set of 22 Core metrics and a range of Expanded metrics to start with.

At the same time the “Big Five” of the global corporate sustainability disclosure and reporting frameworks and standards organizations are collaborating and recently published a shared vision of the elements necessary for achieving more comprehensive and holistic corporate sustainability reporting.

The five organizations are: CDP; the Climate Disclosure Standards Board (CDSB); Global Reporting Initiative (GRI); International Integrated Reporting Council (IIRC); Sustainability Accounting Standards Board (SASB). Plus TCFD, the Task Force for Climate Related Financial Disclosure, created by the Financial Stability Board (FSB), a G20 nations organization.

Joining the effort: The European Commission; IOSCO (global government securities regulators organization); WEF’s International Business Council; and IFRS.

Each issue of the G&A Sustainability Highlights newsletter we bring you information about the above and much more related to the increasing tempo of the buzzzzz on corporate sustainability disclosure and reporting.

The discussions are taking place worldwide as leadership in public sector, private (business/corporate) sector and social sector address a widening range of ESG issues that will over time determine what kind of world we’ll live in.

See: meeting the challenges of climate change multiple issues, diversity & inclusion, populations deciding on democracy or authoritarianism, having ample food supplies or facing starvation, providing equality of opportunities & outcomes, pandemics to come, rapidly disappearing natural resources, political financing, a range of labor/workforce challenges…and more.

The content silos in our newsletter are designed to help you scan and select the news and perspectives we gather for you each issue.

The G&A Institute’s “Sustainability Headquarters” (SHQ) web platform has many more items selected by our editorial team led by EVP Ken Cynar for you. He’s assisted in these efforts by G&A’s Amy Gallagher, Reilly Sakai, Julia Nehring, Elizabeth Peterson, Lucas Alvarez, Lou Coppola, and Hank Boerner. All of this is team effort! Check the expanded related contents not in the newsletter on SHQ!

We constantly monitor all of the above issues — the global ESG disclosure buzz! — and participate in certain of the conversations as guiding the ESG disclosure and reporting of our corporate clients is at the core of the G&A Institute mission.

TOP STORIES

Eyes on Financial Accounting and Reporting Standards – IASB & FASB Consider “Convergence” and Separate Actions

by Hank Boerner – Chair & Chief Strategist – G&A Institute

March 2021

Investors Call For More Non-Financial Standards for Corporate Reporting, Less Confusion in “Voluntary” Disclosure.

Should there be more clarity in the rules for corporate sustainability accounting and reporting as many more investors embrace ESG/Sustainable analysis and portfolio management approaches?

Many investors around the world think so and have called for less confusion, more comparability, more credible and complete corporate disclosure for ESG matters.

Accounting firms are part of the chorus of supporters for global non-financial disclosure standards development.

Where and how might such rules be developed? There are two major financial accounting/reporting organizations whose work investors and stakeholder rely on: The International Accounting Standards Board (IASB) and in the United States of America, the Financial Accounting Standards Board (FASB). Both organizations develop financial reporting standards for publicly traded companies.

There are similarities and significant differences in their work. The US system is “rules-based” while the IASB’s approach has been more “principles-based” The differences have been diminishing to some degree with the US Securities & Exchange Commission more recently embracing some principles-based reporting.

By acts of the US Congress, FASB (a not-for-profit) was created and has governmental authority to impose new accounting rules — while the IASB rules are more voluntary.

The US system has “GAAP” – Generally Accepted Accounting Principles for guidance in disclosure. The adoption of IFRS is up to individual countries around the world (144 nations have adopted IFRS).

The IASB standards are global; these are the “IFRS” (International Financial Reporting Standards) issued by the IASB.

The FASB standards are used by US-based companies. For years, the two organizations have tried to better align their work to achieve a global financial reporting standard – “convergence”.

The IFRS Foundation is based in the United States and has the mission of developing a single set of “high-quality, understandable, enforceable and globally-accepted accounting standards (the IFRS), which are set by IASB.

In 2022 IASB and FASB will have a joint conference (“Accounting in an Ever-Changing World”) in New York City to “…strengthen connections between the academic and standard-setting communities…” and explore differences and similarities between US GAAP and IFRS Standards.

Consider that the Financial Stability Board (FSB), which launched the TCFD, is on record in support of a single set of high-quality global accounting standards.

Convergence. In the USA, the “whole of government” approach to the climate crisis by the Biden-Harris Administration may result in encouragement, perhaps even rules for, corporate ESG disclosure. The IASB is not waiting.

The IFRS Foundation Trustees are conducting analysis to see whether or not to create another board that would issue global standards for sustainability accounting and reporting.

A proposal will come by the time of the UN Climate Change Conference this fall. Should the IFRS foundation play a role? The International Federation of Accountants (IFAC) thinks so.

Many questions remain for IASB and FASB to address, of course. This is a complex situation, and we bring you some relevant news in the newsletter this week.

TOP STORIES

Here’s an update from the IFRS Foundation and what is being considered:

Meanwhile, the European Commission separately is exploring how to strengthen “non-financial” reporting – there’s the possibility that there could be EU standards developed:

Helpful information about the FASB-IASB differences:

About “Stakeholder Capitalism”: The Public Debate

Here is the Transition — From the Long-Dominant Worldview of “Stockholder Capitalism” in a Changed World to…Stakeholder Capitalism!

by Hank Boerner – Chair & Chief Strategist – G&A Institute

October 2020

As readers of of G&A Institute’s weekly Sustainability Highlights newsletter know, the shift from “stockholder” to “stakeholder” capitalism has been underway in earnest for a good while now — and the public dialogue about this “21st Century Sign of Progress” has been quite lively.

What helped to really frame the issue in 2019 were two developments:

  • First, CEO Larry Fink, who heads the world’s largest asset management firm (BlackRock) sent a letter in January 2019 to the CEOs of companies in portfolio to focus on societal purpose (of course, in addition to or alongside of corporate mission, and the reasons for being in business).
  • Then in August, the CEOs of almost 200 of the largest companies in the U.S.A. responded; these were members of influential Business Roundtable (BRT), issuing an update to the organization’s mission statement to embrace the concepts of “purpose” and further cement the foundations of stakeholder capitalism.

These moves helped to accelerate a robust conversation already well underway, then further advanced by the subset discussion of Corporate America’s “walking-the-talk” of purpose et al during the Coronavirus pandemic.

Now we are seeing powerful interests weighing in to further accelerate the move away from stockholder primacy (Professor Milton Friedman’s dominant view for decades) to now a more inclusive stakeholder capitalism.  We bring you a selection of perspectives on the transition.

The annual gathering of elites in Davos, Switzerland this year — labeled the “Sustainable Development Impact Summit” — featured a gaggle of 120 of the world’s largest companies collaborating to develop a core set of common metrics / disclosures on “non-financials” for both investors and stakeholders. (Of course, investors and other providers of capital ARE stakeholders — sometimes still the inhabiting the primacy space on the stakeholder wheel!)

What are the challenges business organizations face in “making business more sustainable”?

That is being further explored months later by the World Economic Forum (WEF-the Davos organizers) — including the demonstration (or not) of excellence in corporate citizenship during the Covid-19 era. The folks at Davos released a “Davos Manifesto” at the January 2020 meetings (well before the worst impacts of the virus pandemic became highly visible around the world).

Now in early autumn 2020 as the effects of the virus, the resulting economic downturn, the rise of civil protests, and other challenges become very clear to C-suite, there is a “Great Reset” underway (says the WEC).

The pandemic represents a rare but narrow window opportunity to “reflect, reimagine, and reset our world to create a healthier, more equitable, and more prosperous future.”

New ESG reporting metrics released in September by the World Economic Forum are designed to help companies report non-financial disclosures as part of the important shift to Stakeholder Capitalism.

There are four pillars to this approach:  People (Human Assets); Planet (the impact on natural environment); Prosperity (employment, wealth generation, community); and Principles of Governance (strategy, measuring risk, accounting and of course, purpose).

The WEF will work with the five global ESG framework and standard-setting organizations as we reported to you recently — CDSB, IIRC, CDP, GRI, SASB plus the IFAC looking at a new standards board (under IFRS).

Keep in mind The Climate Disclosure Standards Board was birthed at Davos back in 2007 to create a new generally-accepted framework for climate risk reporting by companies. The latest CDSB report has 21 core and 34 expanded metrics for sustainability reporting. With the other four collaborating organizations, these “are natural building blocks of a single, coherent, global ESG reporting system.”

The International Integrated Reporting Council (IIRC, another of the collaborators) weighed in to welcome the WEF initiative (that is in collaboration with Deloitte, EY, KPMG and PWC) to move toward common ESG metrics. And all of this is moving toward “COP 26” (the global climate talks) which has the stated goal of putting in place reporting frameworks so that every finance decision considers climate change.

“This starts”, says Mark Carney, Governor, Bank of England, and Chair of the Financial Stability Board, “with reporting…this should be integrated reporting”.

Remember, the FSB is the sponsor of the TCFD for climate-related financial disclosure.  FSB is a collaboration of the central banks and treasury ministries of the G-20 nations.

“COP 26 was scheduled for November in Glasgow, Scotland, and was postponed due to the pandemic. We are now looking at plans for a combined 26 and 27 meeting in November 2021.”  Click here for more information.

There is a lot of public dialogue centered on these important moves by influential players shaping and advancing ESG reporting — and we bring you a selection of those shared perspectives in our Top Stories in the Sustainability Highlights newsletter this week.

Top Stories On Davos & More

And then there is this, in the public dialogue on Stakeholder Capitalism, adding a dash of “reality” from The New York Times:

1st in Series: The Software / IT Services Industry – GRI & SASB Standards In Focus – Perspectives on Alignments & Differences

SERIES INTRODUCTION 
GRI & SASB In Focus – Perspectives on Alignments & Differences

Notes from the G&A Institute Team on the series of commentaries by members of the G&A Sustainability Report Analyst Interns…

With the recent publication of the much-anticipated “Report on US Sustainable, Responsible and Impact Investing Trends 2018” issued by US SIF showing that ESG has really hit the capital markets’ mainstream — with $1-in-$4 in the US (by professional investment managers now incorporating ESG).  And, with the recent petition urging mandatory ESG reporting — submitted to the Securities & Exchange Commission by institutional investors  — he need to develop a more standardized framework for corporate ESG reporting is more pressing than ever before.

A recent discussion paper — “Investor Agenda For Corporate ESG Reporting” — with inputs from the CFA Institute, ICGN, PRI, CERES, GSIA, GIIN, and the UNEP-FI — further highlights this issue.

Among other things, the discussion paper emphasizes the need for participants of the Corporate Reporting Dialogue (participants include reporting standard setters – GRI, SASB, CDP, IIRC,CDSB, ISO, FASB, and IFRS) to deliver on their promise to work together to develop a more unified agenda on ESG reporting.

As part of our company’s role as the GRI Data Partner in the USA, UK and Republic of Ireland, G&A Institute’s Sustainability Report Analyst-Interns analyze thousands of sustainability reports each year and contribute the information to the GRI’s Sustainability Disclosure Database. This is the largest publicly-accessible sustainability disclosure database in the world (with now over 50,000 sustainability reports included, dating back to the start of the GRI).

Many of the corporate reports the G&A analysts process use the GRI Standards — and a number have now started to implement aspects of the SASB Standards as well in their disclosure and reporting process, depending on their sector and industry categories.

In their ongoing work, G&A’s Sustainability Report Analyst-Interns have been comparing the two standards for disclosure in specific industries as they carefully examine the corporate reports, and consider two standards’ alignment, similarities and differences.

In this series G&A’s Sustainability Report Analyst-Interns share their own perspectives as they have analyzed reports and noticed similarities and differences.

* * *

We begin our series of shared perspectives with the perspectives of Minalee Busi, looking at the Software and IT Services Industry.

Comments by Minalee Busi – G&A Sustainability Report Analyst-Intern

Discussion regarding sustainability reporting is usually more focused in context of resource intensive industries, and the Software and IT Services sector is often left out.

With sustainability being a major factor in competitive advantage and investor decision-making, Software and IT Services companies need to re-think their sustainability reporting strategies, if they are not already at that point.

SASB identifies a limited number of material issues for the industry for corporate reporting, such as:
• environmental footprint of hardware infrastructure,
• data privacy and freedom of expression,
• data security,
• recruiting and managing a diverse skilled workforce, and
• managing systematic risks from technology disruptions.

Environmental Disclosures

The disclosure suggestions set forth by both the SASB and GRI Standards are in fact quite comparable, and in alignment with each other for some topics.

For example, both standards suggest companies to report on the energy consumed (both renewable and non-renewable) — but with different reporting boundaries.

SASB suggests reporting consumption within the organization — and the GRI Standards ask to additionally include consumption outside of the company.

However, GRI Standards also include disclosures in terms of energy reduction due to conservation and efficiency initiatives — which SASB disclosures do not include.

Similarly, though both the disclosure frameworks require information about water withdrawal and consumption, GRI also expects detailed reporting on water discharge into different water bodies, with information such as whether water was treated before discharge and whether they follow international standards on discharge limits.

The GRI Standards also include disclosure on recycling — which although not very comprehensive, is completely non-existent in the SASB sector disclosure.

Given the increasing e-waste generated by the IT industry, both GRI and SASB could consider including more detailed disclosures in this area for addressing material risks companies face.

Addressing Data Security/Privacy

In terms of data security, both standards include suggestions of disclosures related to data breaches and the number of users affected. But since SASB disclosures are designed to be industry-specific standards, more detailed reporting requirements in terms of data privacy and freedom of speech are found in SASB — including information on secondary usage of user data and monetary losses as a result of legal proceedings associated with user privacy.

Other such additional detailed areas of sector-/industry-specific disclosures by SASB which are not specified in the GRI standards are topics under managing systematic risks — such as performance issues, downtime and service disruptions due to technological impediments; and, activity metrics related to data storage, processing capacity and cloud-computing.

Disclosures with respect to monetary losses due to legal proceedings around intellectual property protection and competitive behaviour can also be found in the SASB Standards.  These disclosures can be loosely be aligned with the GRI disclosures under non-compliance with laws in the socio-economic arena.

S/Social Reporting

With respect to the “S” (social domain) of corporate ESG reporting, both of the standards suggest reporting on employee diversity, with GRI focusing on categories such as age, gender and minority representation and SASB additionally suggesting reporting on data related to the percentage of employees who are (1) foreign nationals and (2) located offshore.

Interestingly, although SASB disclosures are industry specific standards and the IT industry is mainly dependent on human and intellectual capital, there is no specific suggestion of reporting on training and education of employees.

GRI Standards appear to be filling this gap with suggestions of detailed disclosures on average training hours, upskilling and transition assistance programs and information related to employee performance reviews.

Sustainability Reporting Criteria

The GRI Standards have extensive sustainability reporting criteria, of which a major portion of the disclosures fall under the “General Disclosures” — which include materiality, measurement approaches, consistency and comparability of reporting, external assurance, supply chain information, sustainability strategies, and ethics and integrity. This to me is seemingly more transparent as compared to the SASB Standards.

Another such area is stakeholder engagement, which exists in the SASB Standards only in the form of percentage of employee engagement.

The category of Discussion and Analysis under SASB Standards does require reporting on strategic planning about each of the material topics identified, which can be mapped to the Management Approach (DMA) disclosures recommended under each material Topic-specific disclosure area of the GRI Standards.

Alignment – and Gaps

With the above overview, the SASB disclosures and GRI Standards can be seen in alignment with respect to some material topics while having some gaps in others.

However, since both the standards are developed to address the needs different stakeholders – with GRI aiming a broader set of stakeholders and the SASB majorly targeting mainstream U.S. investors — they should not be seen by report preparers as being in competition with each other.

I believe that the efforts of the CDP and important sustainability reporting standards-setters such as GRI and SASB will certainly be welcomed by companies and other stakeholders now struggling to keep up, but the question remains if such collaborations can ultimately lead to the desired standardised sustainability reporting framework that many investors actively seek.

#  #  #

Note:  This commentary is part of a series sharing the perspectives of G&A Institute’s Analyst-Interns as they examine literally thousands of corporate sustainability / responsibility reports.  Click the links below to read the other posts in the series: