I spotted a recent article in the Responsible Investor: ‘Europe’s Green Deal and ESG reporting standards: From (alphabet) soup to nuts’ (20 February). Aptly titled, it describes very well the challenge we face with non-financial reporting: it is fragmented, not underpinned by a global standard, and held back by inertia in the system. The author explores European moves to show leadership in this area, with the European Commission’s announcement that it intends to start work on its own standards on ESG. The article points out that this will lead to a different sort of fragmentation and would not deliver an outcome of consistent global data sets for critical ESG information.
This issue is particularly stark for climate change, where the TCFD recommendations have achieved considerable momentum towards becoming a global standard. Indeed, Mark Carney is looking to COP26 to make TCFD mandatory. TCFD has attracted great support from investors, companies, regulators, policy makers and civil society. It is becoming (in Mark Carney’s words) the ‘go-to standard’. But TCFD’s value as a standard will be enhanced by achieving consistent measurement and metrics – for example, on how to measure and report on emissions by scope, energy intensity or water withdrawal in areas of high stress. Without this rigour, we will not be able to achieve the accountability and transparency that we need.
And so I believe we should call both for mandatory TCFD reporting and the development of related standards for metrics as an outcome of COP26.
How do we move away from the ‘alphabet soup’ and avoid the pitfalls described by Responsible Investor, against the background of a multitude of reporting frameworks and standards and emerging practices in measuring and reporting on ESG factors?
I was privileged last year to chair a task force set up by Accountancy Europe to consider just this. We published our ideas at the end of last year in a paper in their Cogito series: Interconnected Standard Setting for Corporate Reporting. It focused on this central issue: how do we get to a global, core set of standards on non-financial or ESG information to achieve consistent, comparable metrics?
We proposed a vision for achieving a connected approach for corporate reporting. The key ingredients of the proposed model are to:
- Establish a new international non-financial reporting standard setter to sit alongside the existing IASB and create the right mechanism to ensure independent, high-quality standard setting is preserved, involving multiple stakeholder participation and robust due process.
- Evolve the current IFRS Foundation governance model, in recognition that climate and ESG matters relate closely to public policy. This means that policy makers and multilateral institutions need to have a mechanism to exercise effective oversight and to direct the standard setters consistently with the aims of public policy.
- Establish connectivity of non-financial information to financial performance through a framework for connected reporting. This is critical to giving stakeholders insight as to the resilience and long-term prospects of the company.
However, is achieving a core base of metrics on non-financial information enough? Many stakeholders want to go further than ‘the core’ and in fact, many companies are already reporting with a wider perspective. And wider policy objectives such as sustainable investment and the European Green Deal are driving European reporting priorities.
Perhaps it is helpful here to think of ‘building blocks’ – a phrase that was mentioned to me recently and which I now unashamedly borrow. We should achieve a core building block that is globally consistent. Then we might add on further blocks that are developed and issued at regional or local levels to reflect the maturity of adoption of sustainable business and investment in policy and practice.
Is this approach realistic? I think the consensus among stakeholders, especially on the urgency of a standard and mandatory disclosures for climate change, could provide the momentum to move ahead quickly. Indeed, I believe that Europe is in a very good position to act to accelerate the process. Being at the global table and shaping the outcome, acting as the first mover and adopter, will put Europe in a great leadership position. This will demonstrate vision and make a real difference, particularly on climate change where the world has committed to a global target. This view was reinforced by Steven Maijoor, Chair of ESMA, when he said, ‘Given the global reach of the challenges posed by the transition to sustainability, Europe can play a leading role in promoting this consolidation at international level’.
Further, we can build on the work of existing bodies and the standards, frameworks and metrics already developed. They have achieved considerable uptake in the market. A lot of very good work has been done by CDP, CDSB, GRI, IIRC and SASB. Between them they cover the needs of our entire corporate reporting system in a complementary fashion. We should therefore bring the elements together in a way that would allow us to achieve our vision.
By developing global standards for core metrics, we achieve consistency and comparability in disclosures. This is what stakeholders are asking for and what the market needs. There is a global consensus to drive this agenda forward, especially on climate change. This should be our most urgent goal for corporate reporting – and in doing this, we will be delivering a solution that is essential to direct capital to sustainable enterprise.