No Investment Returns on a Dead Planet

Professor Carol A Adams provides her perspective on the divergence in sustainability reporting frameworks.

The recent release by the European Financial Reporting Advisory Group (EFRAG) of its ‘Climate Standard Prototype’ highlights the gulf between the approach to sustainability reporting taken by the EU (working with EFRAG, the Global Reporting Initiative (GRI) and now Shift) and that of the IFRS Foundation (working with the Value Reporting Foundation (VRF)).

The new proposals for climate disclosures released by EFRAG seek to be compatible with both the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations (which draw on the Integrated Reporting framework) and GRI Standards. Conceptually they can be applied to broader sustainable development issues.

Like the Sustainable Development Goals Disclosure (SDGD) Recommendations¹ (which are also aligned with TCFD, Integrated Reporting and GRI Standards), they require disclosure of opportunities arising from sustainable development matters and plans to ensure that the business model and strategy are compatible with sustainable development and global climate change goals.

These narrative disclosures on approach and governance oversight will drive change – something responsible long-term investors want to see. Disclosing the % of remuneration linked to sustainability performance and other internal incentives is key.

Differences in approach

Far from the promised harmonisation, however, significant differences in approach are emerging relating to:

  1. The audience for sustainability reporting

The IFRS Foundation Trustees’ proposals on ‘sustainability reporting’ address “investors”.  But prioritising enterprise value (the sustainability of business) is not about sustainable development. In contrast, the EU, EFRAG and GRI are intent on enhancing transparency for investors and other stakeholders including about the impact of organisations on sustainable development.

  1. Materiality

The EU and GRI are committed to double materiality while the IFRS Foundation proposals and VRF refer to financial materiality. Dressing this gap up as ‘dynamic materiality’ won’t work unless an organisation is already engaging with stakeholders and reporting its impacts.

  1. The approach to developing proposals

The proposals stemming from the EU, EFRAG and GRI collaboration are developed through a formal evidence-based process, are principles based and inclusive of a range of stakeholders. Similarly, the US Securities and Exchange Commission (SEC) consulted on a long list of questions prior to developing proposals.

But the IFRS Foundation Trustees instead put out proposals (informed by a limited constituency) and then consulted. It asked a leading question: “Is there a need for a global set of internationally recognised sustainability reporting standards?” (there already is one) and set out its governance credentials without any analysis of what the governance of a sustainability standard setter should look like or with what is already on offer. While IFRS subsequently acknowledged concerns that emerged through the consultation responses, it did not revise its strategy.

Demand for accountability

I was recently asked by someone who, like me, has been involved in the work of both the International Integrated Reporting Council (now merged with the Sustainability Accounting Standards Board in the VRF) and the GRI whether I thought the GRI would survive given the push for an approach focussed on ‘enterprise value’ and a so-called ‘investor perspective’.

I was surprised by the framing of the question. Accountability for corporate impacts will continue to be demanded.

Responsible investors know that stakeholder concerns have a significant impact on ‘enterprise value’. Reporting companies know this too, many from bitter experience. They will continue to seek legitimacy by referencing reporting standards concerned with disclosure of material sustainable development impacts. This won’t get rid of greenwashing – hence the need for jurisdictions like the EU to make such standards mandatory and audited.

The EU Corporate Sustainability Reporting Directive (CSRD) will have broader influence. Large companies outside the EU will seek to emulate the best reporting practice of their EU counterparts. Large companies within the EU already make accountability demands of companies in their supply chains based outside the EU. These will increase and align with EU requirements.

Identifying impact, driving change

Meanwhile reporting requirements like those proposed by IFRS Foundation and the VRF that don’t hold companies accountable for their material impacts on stakeholders will encourage (albeit unwittingly), rather than curb, greenwash. This is because they provide insufficient information to investors and others about management approach (and governance oversight thereof) to identifying their impact on sustainable development. They will not lead to improvements in sustainability performance.

There are no investment returns on a dead planet.

I think everybody knows this, but some are not acting on it. Changes in investment decision making, corporate strategies and business models must occur to avoid it. They won’t if frameworks, standards, and legislation do not explicitly require it. This is because change is hard and it’s easy to fall back to the profit-seeking motive and other bad habits. This is not opinion; it is informed by rigorous qualitative research examining corporate behaviour in relation to reporting requirements.

The European proposals together with GRI’s Global Sustainability Standards Board have a legitimacy beyond the flawed prototype “facilitated by” the Impact Management Project, World Economic Forum and Deloitte. While it bears the logos of “the five” sustainability reporting bodies then existing, something often referred to by proponents, the GRI’s vision is clearly very different. The EU/EFRAG/GRI solution is superior.

Sustainability matters

I have commented elsewhere on the lack of evidence and hubris underpinning the IFRS Foundation Trustees’ proposals on ‘sustainability’ reporting. The scientific community has raised concerns about the focus on financial materiality for sustainability matters, the “investor perspective”, the legitimacy of the IFRS Foundation to set sustainability standards and the consequences for sustainable development.

Reporting on the impacts of organisations is not enough to drive change, but it is an essential starting point. It’s time for responsible investors to set out their “investor perspective”.

Carol Adams is a Professor of Accounting at Durham University Business School. She has previously been involved in the work of both the GRI and IIRC (now VRF). The views expressed are her own.


1. Adams, C A, with Druckman, P B, Picot, R C, (2020) Sustainable Development Goal Disclosure (SDGD) Recommendations, published by ACCA, Chartered Accountants ANZ, ICAS, IFAC, IIRC and WBA. ISBN: 978-1-909883-62-8 EAN: 9781909883628

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