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The ESG Interview: Taking Alphabet Soup off the Menu

Incoming GRI CEO Eelco van der Enden says investors can rely on two reporting pillars to understand the complex relationships between companies, society and the environment.

Asset owners might be forgiven for greeting with caution the arrival of another reporting framework promising a “comprehensive global baseline of sustainability-related disclosure standards” to help inform their investment strategies.

The International Sustainability Standards Board (ISSB) is the latest initiative. Unveiled at COP26 and consolidating the Value Reporting Foundation (VRF) and Climate Disclosure Standards Board (CDSB), its work will be overseen by the International Financial Reporting Standards (IFRS) Foundation.

The ISSB claims it will deliver “high quality, transparent, reliable and comparable reporting by companies on climate and other ESG matters” and aims to “become the global standard-setter for sustainability disclosures for the financial markets”.

This sounds like the answer to investors’ prayers, starved as they are for comparable and accurate data on the sustainability performance of corporates across their global portfolios. But many argue the ISSB does not go far enough to give investors the full picture by itself. This is because it is expected to follow the lead of one of its successor organisations – the VRF’s Sustainable Accounting Standards Board (SASB) – in focusing on the impact of ESG risks on enterprise value.

In Europe, for example, there are already plans to go further. The planned Corporate Sustainability Reporting Directive (CSRD) will be informed by European Sustainability Reporting Standards (ESRSs), which also require companies to report on their impact on the sustainable development of society and the environment.

The European standards’ double materiality approach will “reflect multi-stakeholder information needs on the full sustainability spectrum across socio-economic and environmental aspects”. They are currently being jointly developed by the European Financial Reporting Advisory Group (EFRAG) in conjunction with the Global Reporting Initiative (GRI), the voluntary sustainability standards-setter whose own standards have long practiced double materiality.

The EU standards are mandatory for the largest 50,000 companies operating in the region, starting from the 2023 financial year. The UK is also expected to adopt sustainability reporting based on double or dual materiality, in its planned Sustainability Disclosure Requirements (SDRs).

Focused on alignment

Some sustainability experts have warned of divergence in sustainability reporting, raising the prospect of different rules across major jurisdictions. But incoming GRI CEO Eelco van der Enden says his organisation’s standards can work well alongside the ISSB.

“It is absolutely useless to see [the ISSB and GRI] initiatives as competing forces; they are complementary,” he says. “My mantra is alignment, alignment, alignment.”

Van der Enden accepts investors may feel overwhelmed by the bombardment of ESG-related reporting guidelines. “But in reality, there are only two sustainability reporting standards-setters”, he says.

“There is the GRI, for impacts on the economy, environment and people that meet the needs of all stakeholders, and there are the SASB standards [which inform ISSB], for enterprise value disclosure for an investor audience,” he explains.

As such, he insists reports of an ‘alphabet soup’ of sustainability standards are overstated. “The broader landscape can be confusing, but companies should not let the myriad of ESG guidelines, raters, certifiers and others distract them from fulfilling their transparency obligations,” he says.

While he welcomes the ISSB, van der Eden also concedes there is a “huge risk” that it may cause policymakers to favour reporting based on enterprise and shareholder value, over a multi-stakeholder model that considers wider societal and environmental impacts. This could lead them to mandate sustainability reporting that falls short of investors’ expressed needs.

“ISSB has our full support, but when it comes to full disclosures on sustainability, you need to have the societal impact alongside financial. It is up to [GRI] to market our message and our purpose better so that regulators and policymakers understand the importance of sustainability reporting.”

He adds that GRI will continue to engage with ISSB, noting, “What’s important is that we move towards a strengthened two-pillar structure for corporate reporting – both financial and sustainability – with each on an equal footing.”

There is evidence that the GRI view is supported by finance leaders. The EY 2021 Corporate Reporting Survey of 1,000 large company CFOs found 71% had seen a significant acceleration in “the transition from shareholder capitalism to multi-stakeholder capitalism and providing long-term value to shareholders, customers, employees and communities.”

The report adds that finance leaders “recognise that the strategic context for reporting has fundamentally changed, and that multi-stakeholder capitalism is now the mode.”

Van der Enden says companies appreciate the importance of double materiality reporting, not only to attract investment, but also from a commercial position. He also points out that this appreciation is global. The second largest number of companies reporting using GRI standards come from the US, a fact that goes some way to undermine the perception that the US is unlikely to follow Europe and the UK in mandating sustainability reporting requirements that embrace double materiality.

“Customers look at organisations’ social impact, so companies want to communicate on their positive endeavours. Companies that do not take care of human rights or use child labour will suffer severely in the public domain and then in the regulatory environment,” says van der Enden.

“It’s not only taking care of the value of the assets of the asset owner, but also it’s important to get to grips with these with these issues from a risk management point of view.”

External validation

For double materiality reporting to deliver fully to investors, however, van der Enden acknowledges multiple remaining hurdles, such as the perennial challenges of measuring and verifying a company’s external impact, particularly on social issues. In some cases, fundamentals still need to be addressed, including identifying and agreeing on the most appropriate metrics.

“For environmental issues, it is typically easier to measure; you have carbon trading, for example, which you can easily monetise and report. That is perhaps easier than something like diversity, equal pay or wider societal impacts.”

Van der Enden also recognises a dearth of effective verification for company reporting on ESG risks and impacts.

“When it comes to external audit to validate those reports, this is a relatively new science. Do we have sufficient auditors? No, not at the moment. But that is not a reason for it not to move ahead.”

Echoing Eurosif’s calls in an interview with ESG Investor last week, van der Enden would like to see more rigorous measures to authenticate companies’ net zero claims.

“One of the biggest threats to the credibility of the whole system is greenwashing; overselling [sustainable credentials] and underperforming. We should be able to audit [net zero claims], and while there is no one silver bullet to remedy and save the planet, there are certain steps that must be made which are interconnected, complementary and interdependent,” he says.

Van der Enden is sanguine that GRI will play a pivotal role in the future sustainability framework, but says he is realistic about just how far the standards will be incorporated into mandatory reporting requirements.

“Over 10,000 companies choose to use the GRI standards voluntarily because they understand that broad sustainability reporting, beyond enterprise value alone, is needed to achieve socio-economic and environmental cohesion. As more organisations accept that being fully open and transparent is also good for business, I am confident that GRI’s global role will continue to grow.”

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