The ESG reporting season is starting back up again…or maybe it never ended?
Last week, Rebecca Leonard of Purposeful Projects and I highlighted context, content and communication channel trends. Today we are focused on frameworks and metrics. Happy ESG reporting season!
To read our first blog on the topic click here.
To hear the Boston College Center for Corporate Citizenship webinar on ESG reporting click here.
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ESG framework organizations have had a busy 2020. New publications and partnerships are focused on alignment, but we shouldn’t ignore the push for better performance data. As we plan and write our 2020 corporate responsibility reports, consider that:
ESG frameworks are moving towards integration
Frameworks better understand the realities of the business world
Measurement is getting more rigorous
Board engagement and communication is increasing
ESG Frameworks are Moving Towards Integration
Reporting frameworks and governing bodies are discussing collaboration with each other and with their financial reporting counterparts. In recent months two noteworthy developments were the Statement of Intent to Work Together Towards Comprehensive Corporate Reporting and Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.
CDP (formerly the Carbon Disclosure Project), Carbon Disclosure Standards Board (CDSB), Global Reporting Initiative (GRI), International Integrated Reporting Council (IIRC), and Sustainability Accounting Standards Board (SASB) issued a Statement of Intent to Work Together Towards Comprehensive Corporate Reporting describing a shared intent to provide joint guidance on how reporting frameworks and standards can be applied together and a vision of how they can complement financial generally accepted accounting principles (Financial GAAP). And the corporate responsibility community collectively said, “…finally.” In some cases, this isn’t huge news as these organizations have slowly been aligning over the last 5 years but the appendix at the back which catalogues which standards and disclosures are aligned across the different frameworks is a valuable tool.
The World Economic Forum published common metrics for the consistent reporting of sustainable value creation, mainly drawing upon the prior work of CDSB, GRI, IIRC, SASB, and the TCFD. Pundits have been quick to poke fun of the fact that the “Big 4” consulting firms (who collaborated on this publication) did what they do best, take other peoples’ work and repackage it, but it’s a good document, especially if you are new to reporting and want a place to start the reporting process. The 21 core metrics and 34 expanded disclosures will focus your efforts and the ESG “themes” help organize your thinking. The prosperity section, which highlights US GAAP indicators, is particularly helpful to think about how business contribute to communities.
Frameworks Better Understand the Realities of the Business World
The reporting frameworks are governed and managed by nonprofit organizations which makes them more credible but sometimes the business community and nonprofit world have difficulty understanding and appreciating each other. Both GRI and the SASB have been listening and making changes to reflect the realities of reporting in the corporate world.
The Global Reporting Initiative (GRI) published draft revisions of its universal standards for public review. Among other items, these revisions incorporate the UN Guiding Principles on Human Rights (UNGPs) and include a new definition of materiality that is more directly focused on a company’s impacts outward on the economy, environment, and people. The change is great news for corporate reporters. GRI has been using the two dynamics of “significance to stakeholders” and “significance of economic, environmental, and social impact” to define materiality and that was really difficult for corporate colleagues to get their head around.
GRI and the other frameworks are now using a term called “dynamic materiality” which asks us to prioritize ESG topics that are:
Reflected in financials (read our annual reports and 10-Ks)
Sustainability topics material to companies value creation
Sustainability topics that the company impacts in the areas of economy, environment, and people
This is clearer and more company-centric, making it significantly easier to explain and discuss with colleagues. It also better articulates the duality of materiality which reflects how companies impact and are impacted by ESG issues.
The Sustainability Accounting Standards Board (SASB) published proposed changes to its conceptual framework that, among other things, reflect a more global and less US-centric context. This is an interesting shift, as SASB has historically focused on the US investor community and the Security Exchange Commission (SEC). Critics see this as yet another example of a nonprofit with mission creep but with increased alignment with other ESG frameworks, the global nature of business, and the increased profile of the framework being highlighted by Larry Fink’s (CEO of BlackRock) “Letter to CEOs,” makes this shift inevitable.
Measurement is Getting More Rigorous
The level of scrutiny that investors are using to review reports is increasing, and there is a demand from multiple stakeholders for goals and metrics. Reports are moving beyond inputs and outputs, and increasingly basing content on progress tied to broader social outcomes. Tools like the UN Global Compact SDG Action Manager are aiding CSR practitioners in linking their citizenship activities to the UN Sustainable Development Goals and their outcomes.
Technological advances—such as satellite imaging that provides asset-level carbon emissions data—are yielding more information, and investors are enhancing their research and analytical capabilities so that they can identify the key trends influencing financial impact. In a 2020 study by EY, 83% of investors surveyed consider formal frameworks to be necessary in assessing long-term value. A 2019 study by McKInsey & Co. found that nearly 67% of investor respondents say assurance of sustainability information should be as rigorous as a financial audit. Companies are responding by using an increasing number of frameworks, and assurance is on the rise.
“This is a unique moment in history to walk the talk and to make stakeholder capitalism measurable,” said World Economic Forum founder and executive chairman Klaus Schwab in a statement.
Board Engagement and Communication is Increasing
Reporting framework and disclosure trends are largely being driven by the investor community. As a result, investor relations, executives and the board are more involved. A Nasdaq report, “How Investor Engagement is Changing: What Boards Need to Know,” reviewed 50 S&P100 companies saw increased ESG engagement by corporate boards. This includes a specific ESG letter to investors and other stakeholders, board discussions about ESG topics, ensuring compensation and ESG performance are connected, and committee and title name changes to include words such as “sustainability,” “human capital,” and other ESG terms that reflect changes in approach and priorities.
Duke Energy’s recent ESG Investor Day (October 9, 2020) is a great example of how the board and executive leadership are communicating more with investors. At this event their President, CEO, and Board Chair, Lynn Good announced new executive compensation requirements tied to climate-change performance as well as environmental justice initiatives and new policies to help customers unable to pay utility bills due to the pandemic.
Other examples of board engagement include Starbuck’s CEO, Kevin Johnson spelling out the coffee company’s new sustainability commitments in a letter to stakeholders, CVS Health’s CSR Priorities Dashboard for investors, and ESG highlights included in Tanger Factory Outlet’s annual report.
The investor community is increasing the profile of ESG frameworks and we would be remiss if we didn’t prioritize them. This will take the tangible form of more indexes and data summaries at the back of the report but must also be considered early in the planning process. While integration is happening, it isn’t complete. Strategic decisions about which frameworks to prioritize and what metrics to disclose still need to happen.
Want to dive deeper into this topic? Then see Et Cetera below...
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