As institutional investors, employees and other stakeholders focus on ESG, board members and management want consistent standards for measuring corporate efforts and advancement.
The Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC) have worked separately on ESG reporting standards, developing the “Integrated Thinking Principles,” “Integrated Reporting Framework” and “SASB Standards.” Those programs will now be merged into the Value Reporting Foundation (VRF).
Says VRF CEO Janine Guillot: “By more closely aligning the Integrated Reporting Framework and the SASB Standards, the Value Reporting Foundation will make it easier for businesses to communicate their long-term strategy and provide a more comprehensive view of business performance to investors and other providers of capital.”
Guillot is the former CEO of SASB and current CEO of VRF, and is joined by co-chairs Richard Sexton, former vice chair of PwC, Global Assurance, and Robert K. Steel, chair of Perella Weinberg Partners.
“I think the merger elevates not only ESG information, but how we talk about comprehensive corporate reporting,” says Jonathan Labrey, chief policy officer at VRF and head of its U.K. office. “It links financial information to ESG information and includes the intangibles — what we would call in the IIRC framework the intellectual capital.
“There are two parts to the merger. One is the comprehensive nature of the information that the Value Reporting Foundation is overseeing through the standards and framework that we have. The other is that this is becoming much more an issue for the board and for the management of the business. I think this is not just about corporate disclosure and reporting, but it's actually about better corporate governance as well.”
“Making ESG reporting structures and standards clear and usable is key,” Labrey says. “This merger was a response to market pressure for greater simplification. We have a responsibility to demonstrate how these ESG reporting systems work together as one system and to end the perception of competition between the standard-setting organizations and the framework providers. We can move to demonstrate how all the different standards and frameworks actually are interoperable and ultimately part of one global corporate reporting system.”
That doesn't mean that these standards or frameworks will be universal. Many board members want ESG reporting to reflect different industry needs and priorities.
“We believe strongly that there should be a layer of qualitative or narrative reporting around governance, strategy and risk. There should also be a layer of industry-agnostic or cross-industry metrics and a layer of industry-specific metrics,” says Neil Stewart, director of corporate outreach for the VRF.
He adds that SASB has already established those metrics. “Industry-specific metrics are incredibly important, and they give such good insight into how management and boards are coping. It's not just about emissions. There are some other nuanced industry metrics.”
Early adopters of these standards and framework are “future-proofing” their companies, since SEC regulations and other global standards that combine qualitative and narrative reporting are in the works, he says.
Michael Montelongo, an experienced board member of both public and private companies, predicts that boards and management teams will be “prudent” in adopting any metrics/reporting structures so that they're tailored and aligned to business strategies rather than rushing to be early adopters.
He says he anticipated a universal, material, and industry-agnostic system was within reach last year when The World Economic Forum (WEF) and its International Business Council (IBC) released a new reporting framework for ESG standards after collaborating with Deloitte, EY, KPMG and PwC.
“I thought, ‘OK, maybe this is the stake in the ground everyone's been seeking,'” Montelongo says. “It seemed the development with the WEF and the Big Four was something that was going to gain traction.”
But then, he says, the initial fanfare notwithstanding, talk of the framework died down. Meanwhile, proxy advisors ISS and Glass Lewis are using their own ESG “scorecards” for corporations.
“We're witnessing a wide network of standard-setting firms and rating agencies in this space each claiming unique features and niches and each probably attempting to establish marketplace distinction,” Montelongo says. “So, in theory, the work by the WEF/IBC and the recent SASB/IIRC consolidation should lead to more consistent sustainability standards and reporting. Such an alignment should reduce the current complexity and facilitate comparability among companies. Yet, it's also important to note that some of this activity is more globally-focused while other projects are more U.S.-centric.”
The evolution of market interest in ESG reporting is impressive, Labrey says. He recalls that when the IIRC was ready to launch, no one, including him, knew if the market would be interested. IIRC was prepared to be a temporary organization.
“We were formed at the right time, when the ESG movement was really accelerating,” Labrey says. “I now see the distinction closing between the ‘traditional' ESG investors and mainstream investors. Most investors are looking for this broader information, since financial materiality now encompasses issues relevant to enterprise value and climate change, climate risk, water sustainability and more.”
Guillot says that while accounting standards took decades to develop, the foundation expects an accelerated timeline that will have concrete ESG reporting standards within one to three years. Human capital sustainability is one example, with diversity and inclusion, job quality and intellectual capital all under assessment on parallel tracks.
While work continues to align the SASB Standards and the IIRC Reporting Framework, as well as the Integrated Thinking Principles, Labrey and Stewart say there will be a significant announcement at The UN Climate Change Conference, COP 26, scheduled for November in Glasgow, Scotland.
Standards and the process by which to measure them will surely evolve and grow as ESG priorities shift, but Montelongo would like to see a core set of reporting standards and metrics that cut across industries and business models with an ESG disclosure regime established sooner rather than later, and he sees the SEC playing a key role in achieving this breakthrough in the U.S.
“Because the new administration in Washington and the SEC have announced ESG is a priority, the SEC has already taken steps to lay the groundwork for a more consistent and comprehensive regulatory framework which companies and investors will appreciate. That can help make compliance a more straightforward task for everyone.”