Commentary

ICYMI, We’re in Danger of Reinventing the Wheel

Davos went digital this week, but its attempts to go green raised more questions than answers.

At ESG Investor, we’ve got nothing against initialisms or TLAs (three-letter acronyms). The clue’s in our name. Some people get excited about four, perhaps justified with the likely future role of the IFRS Foundation in sustainability disclosures. Five can be a stretch, but we’ll make exceptions for the sterling work of the NZAOA (for an update, see next week’s ESG Interview). Personally, I’ve always had a soft spot for IOSCO, perhaps because they sound like they were founded by a Bond villain (honourable mentions to the less-sinister GLEIF and GSTPA).

Two new-ish acronyms got their share of attention at WEF’s annual Davos conference this week. But it may be too early to say whether either are destined to join the TLA HoC[1].

On Tuesday, WEF and its International Business Council (IBC) announced the commitment of 61 leaders of major global businesses to a set of core Stakeholder Capitalism Metrics. These SCMs, built with the help of the big four accounting firms, are designed to deliver “universal, comparable disclosures focused on people, planet, prosperity and governance that companies can report on, regardless of industry or region”. This is a laudable, if not unique, aim.

From the POV of the LTI (long-term investor), it has to be a good thing that CEOs of global businesses are prepared to back a global approach to sustainability-related, or non-financial, disclosures, recognising the critical importance of ESG factors to long-term business success.

That said, 61 is something of a drop from the 120 or so members the IBC claimed were on board when the metrics were first published last September. Or the 140 who committed to aligning corporate values and strategies with UN SDGs (Sustainable Development Goals) in 2017.

The 61 will reflect the SCMs in all their future reporting (on a comply-or-explain basis). They will also encourage business partners to do likewise, and promote further ESG standards convergence. Backers spring from a variety of sectors including finance, technology, manufacturing, and strong representation from energy, including Total, Royal Dutch Shell, Repsol, Eni, Equinor and bp.

It is perhaps strange that the WEF’s SCM press release does not mention the work of the IMP (Impact Management Project), which has been coordinating the efforts of the Group of Five sustainability reporting and standards bodies to harmonise existing disclosure frameworks.

Not least because WEF is a partner in this process, supporting the CDP, the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB).

As noted above, it is widely expected that the IFRS Foundation will soon enter the fray, by establishing a Sustainability Standards Board (SSB). This has been welcomed by the Group of Five as a game-changing development that would give even greater impetus to their existing efforts to create a single globally applicable framework for corporate reporting on sustainability performance.

Where do the SCMs fit in, with their 21 core and 34 expanded metrics across four pillars?  According to the IBC framework document, the SCMs “are deliberately based on existing standards, with the near-term objectives of accelerating convergence among the leading private standard-setters and bringing greater comparability and consistency to the reporting of ESG disclosures”.

What this means in practice is that each of the SCMs, from pay gaps to resource circularity, draws on an existing source standard, sometimes originally drafted by one of the Group of Five, sometimes drawn from other sources, including the recommendations of the TCFD, or the UN Guiding Principles.

With this pick’n’mix approach, has the IBC delivered a TKO (technical knock out) to sustainability reporting fragmentation before the SSB has got its boots on?

Dr Robert Eccles, Visiting Professor of Management Practice at the University of Oxford’s Said Business School, and a leading guru on integrated reporting, sees trouble ahead.

In a blog published last March, as the IBC was increasing its focus on non-financial reporting, Eccles worried that business titans might march “blindly ahead thinking investors and companies will accept their standards because of their power and high profile, even though they lack the legitimacy achieved by due process”.

One could argue that this week’s statement confirms these fears. Eccles, however, has remained optimistic that coordination, between big business, existing standards bodies and regulators, will win out, noting the importance of c-suite buy-in to realise meaningful change.

“We now have a group of influential companies acknowledging the importance of global standards for mandated reporting,” he wrote recently.

Some may find further fault in the fact the IBC approach draws on frameworks with different approaches to materiality, even if Eccles and others are reassured by its recognition of its dynamic nature. But if he’s right, investors will welcome the end of BAU.

Back at Davos, the SCMs were rapidly followed by an update from the TSVCM, or Taskforce on Scaling Voluntary Carbon Markets, which has been charged for industrialising the trading of carbon credits. This is seen as essential for firms that cannot decarbonise their activity quickly enough to be aligned with the aims of the Paris Climate Agreement, enabling them to reach net-zero targets by investment in natural climate solutions.

Despite releasing a 20-point plan for delivering a scalable carbon market and a roadmap covering nine areas, the TSVCM, sponsored by the Institute of International Finance (IIF), was criticised on grounds that the environmental criteria for offsetting projects was largely TBD (to be decided). To be fair, the project is very much a WIP (work in progress).

But my acronym of the week comes from Washington, not Davos. Buried at the end of new US President Joe Biden’s list of actions on tackling the climate crisis, issued Wednesday, was the executive order to reinstitute PCAST, the President’s Council of Advisors on Science and Technology.

Part of the new administration’s commitment to put science at the heart of its decision-making, the re-establishment of PCAST is designed to ensure that Biden and his cabinet seek “input, advice, and the best-available science, data, and scientific and technological information from scientists, engineers, and other experts in science, technology, and innovation”.

Whatever our differences, perhaps PSF (Putting Science First) is one acronym we can all embrace.

[1] Hall of Fame

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