Global Reporting Initiative Chair Eric Hespenheide is optimistic on the future of sustainability reporting standards, despite differences and deadlines.
Investor demand for sustainability-related information is not being properly met and there must be improvements in the current landscape of sustainability standard-setting. This is the view of the International Organisation of Securities Commissions (IOSCO) in a report published this June, which also backed the establishment of an International Sustainability Standards Board (ISSB) to replace the fragmented system of voluntary reporting guidance that exists currently.
The Global Reporting Initiative (GRI) is one of the leading sustainability reporting organisations that will inform the ISSB and help come up with a prototype for global sustainability reporting standards which will inform the IFRS Trustees as they develop their technical recommendations.
GRI is also lending its expertise to similar work in Europe. Since early July it has been part of the European Financial Reporting Advisory Group (EFRAG) Project Taskforce on non-financial reporting standards.
Eric Hespenheide, chair of the GRI, says this accelerated collaboration is encouraging ahead of COP26 Summit which is to be held in Glasgow this November. However, the northern hemisphere summer holiday season has slowed progress.
“That is not to say the other groups aren’t meeting and there has been pressure to ‘deliver, deliver, deliver’, but there are a lot of ‘out of office’ notices. I suspect that in early September there will be resurgence of activity,” he says.
The summer break aside, Hespenheide expresses differing assessments of the current status of the IFRS project versus that of its EFRAG counterpart, aimed at creating the European Sustainability Reporting Standards which will be used to report under the European Commission’s Corporate Sustainability Reporting Directive.
“EFRAG is the one that has made the most progress in terms of a path for collaboration with GRI. It is less clear what the path forward will be with IFRS,” he says.
Hespenheide says he has far more confidence in the EU’s chances of achieving improved sustainability reporting, than that of his home nation the US, where the Securities and Exchange Commission (SEC) recently held a consultation on mandatory climate disclosures.
However, he concedes that EFRAG is further ahead in its work than that of the IFRS in part because of the Trump administration’s withdrawal from global cooperation on numerous climate change initiatives, including the Paris agreement.
“I am much more optimistic [IFRS will achieve its aims] now that the US has re-joined. Federal agencies are ploughing ahead towards achieving these reporting standards and the SEC and the EPA [Environmental Protection Agency] are a key part of that,” he says.
Key to GRI’s contribution to the debate is policymakers’ acceptance of double materiality in sustainability reporting. In Europe, double materiality – reporting on both sustainability factors affecting the company (financial materiality) and how the company impacts on society and the environment (outward materiality) – is already part of the European Commission’s proposed Corporate Sustainability Reporting Directive (CSRD).
However, Hespenheide says IFRS has not, as yet, taken the same approach.
“We have an overarching concern that IFRS is using sustainability standards and reporting in a narrow sense compared to GRI. We have had a bit of back and forth around the nomenclature and we will hopefully get some clarity. When someone talks about sustainability standards, they know that relates to the impact on a company, but we want the reporting to include broader impacts on society and environment at large,” he says.
Hespenheide would also like to see broader inclusion of social and governance issues in sustainability reporting standards, to bring them up to the same prominence of their environmental counterparts.
However, he says that with many regulators, asset managers and owners so “intensely focused” on the Taskforce for Climate-related Financial Disclosures and other environmental reporting, GRI has its work cut out in widening the scope.
In addition, the difficulties in measuring and quantifying social and governance impacts make it even more challenging to include these important elements in sustainability reporting.
“The environmental side has the benefit of being based on science upon which – climate change deniers not withstanding – are largely agreed. The same is not true for social and governance which can be much more emotional,” Hespenheide says.
As part of its commitment to double materiality across sustainability reporting, the GRI will continue to engage with companies to better understand their S and G impact; the steps they take to mitigate those; and then translate this to investors.
As Hespenheide says: “This requires more thought and investigation.”
Funding for further work in this area, however, does not come easy and Hespenheide makes no secret of his frustration at the lack of financial support for the GRI.
“We have been operating on more than a shoestring, but our ambition still has been constrained by resource availability. We have the capacity and ambition to do more than we are doing currently, but we have been unable to crack the code as to how to get more organisations and governments to recognise that there is a cost to all this,” he says.
Notwithstanding certain commercial activities, the GRI offers its standard-setting service for free. As Hespenheide is keen to point out, that doesn’t mean standards are cheap to devise.
“It is great that people want to use [GRI], but they need to help us pay for it,” he says
As the work in developing global sustainability reporting standards continues and more parties become involved, GRI is keen to ensure there is no compromise on the importance of ‘doing it right’.
Hespenheide says: “We often hear comments about making [the standards] simpler and I say this is not simple; there is nothing simple about these issues. If we simplify the approach, then there is a chance the work could get hijacked.”
Room for optimism
Hespenheide’s prediction of a resurgence of activity on sustainability reporting standards from early September onward is underwritten by the urgency of the climate crisis and the timelines set by COP26. In particular, the ISSB is due to be formally launched ahead of the summit.
While he accepts there are plenty of obstacles yet to be overcome given the nascent nature of the ISSB, Hespenheide is sure no challenge is insurmountable.
He says: “I am an optimist by nature, and I wouldn’t be doing this job if I didn’t think our goals couldn’t be achieved.”
But with just 15 months until IFRS must deliver its first set of standards, Hespenheide’s positive outlook will need to be matched by a notable effort to get things done.