The rise of ESG investing has resulted in an evolving and sometimes confusing set of ESG acronyms. Companies often struggle to make sense of the hundreds of ESG ratings, rankings, indexes and disclosure frameworks in the marketplace.
On September 22nd, the World Economic Forum, the International Business Council and the Big 4 accounting firms announced a new initiative that seeks to synthesize at least one aspect of that ESG ecosystem: company sustainability reporting. The group’s Towards Common Metrics and Consistent Reporting of Sustainable Value Creation goal was to “form the building blocks of a single, coherent, global ESG reporting system.” What types of disclosure does this initiative recommend? What does it mean for companies and their current sustainability reporting strategy? How is this initiative likely to evolve moving forward?
The Big Idea
The project is a collaboration between the World Economic Forum (WEF), the International Business Council (IBC), Deloitte, KPMG, EY and PWC (collectively, the “IBC Disclosure Project”). It is a follow-up to the IBC’s 2017 initiative to align company corporate values and strategies with the UN Sustainable Development Goals (UN SDGs). The IBC Disclosure Project's stated goal is to bring greater consistency and comparability to sustainability reporting by establishing common metrics for company disclosure.
The framework encourages disclosure on a “comply or explain” basis, with materiality, confidentiality and legal constraints listed as acceptable reasons for not disclosing to a particular disclosure metric. In this context, “materiality” can be defined by the company and need not conform to any regulatory definition of the term. Reporting is also encouraged via annual reports or proxy statements to help ensure Board oversight and participation of sustainability disclosure. Companies could to continue to use sustainability reports for any supplemental sustainability information.
The Four P’s, SCM’s and Other New ESG Acronyms
The IBC Disclosure Project establishes “stakeholder capitalism metrics” that are to be used by companies to align their sustainability reporting and also track the company’s contributions to the UN SDGs. The metrics include at least some of the existing disclosure frameworks such as SASB, GRI and complete TCFD, as well as other types of company disclosure requirements such as US GAAP. The stakeholder capitalism metrics are organized under four sustainability pillars: People, Planet, Prosperity and Principles of Governance.
Specifically, the 21 “core” metrics and 34 “expanded” indicators are primarily quantitative metrics that, in the IBC Disclosure Project’s view, are either already being reported or easily obtained with reasonable effort. Companies are encouraged to report to the “core” metrics in the short-term, with the “expanded” metrics to be disclosed over the longer-term. Importantly, diversity was specifically highlighted as a “core” metric to reflect “the heightened importance of additional indicators beyond gender.” Other examples of core stakeholder capitalism metrics include GHG emissions, water consumption, pay equality, product innovation, taxes, board composition and the process and outcomes on any stakeholder engagement.
What’s Next for the IBC Disclosure Project
The IBC Disclosure Project has invited its members to declare their intention to report on these metrics and disclosures. A timeline for that process will be presented at the IBC’s winter meeting in January of 2021. Beyond the approximately 60 IBC companies that participated in the project, we are not aware of any company that has publicly committed to report on these metrics to date, though it is likely too early to draw any meaningful conclusions from that.
Teneo Takeaway: Investor Support Will be Critical to the IBC Disclosure Project’s Success
We believe that the success of the IBC Disclosure Project will hinge on whether major investors believe this to be a comprehensive ESG disclosure framework that addresses all of their disclosure requirements. For example, both BlackRock and SSGA have been clear that they want all companies to disclose to the full SASB disclosure framework by the end of 2020. While the IBC Disclosure Project does encourage full disclosure to the TCFD, it only partially addresses the SASB framework. It is also unclear whether major investors had influence into the drafting of the IBC Disclosure Project that they may have preferred. When engaging with investors, companies should attempt to gain a more fulsome understanding of expectations for disclosure as well as feedback on the company’s disclosure. As part of this process, companies should also solicit investor views on frameworks such as IBC.
Teneo Takeaway: Collaboration Should not be Confused with Consolidation
The IBC Disclosure Project notes that it views it as complementary to other disclosure frameworks and “could form the building blocks of a single, coherent, global ESG reporting system.” Interestingly, the IBC announcement comes within days of the CDP, CDSB, GRI, IIRC and SASB announcement that they plan to come together to demonstrate their own commitment to working toward a comprehensive corporate reporting system. Still other initiatives were recently announced that seek to create a consolidated international disclosure framework, such as the International Accounting Standards Board. At the same time, many of these disclosure frameworks continue with initiatives that seek to expand their individual reach. For example, SASB recently announced plans to broaden the global applicability of its disclosure standards. So while collaboration may be a stated priority for many of these disclosure frameworks, it should not be interpreted as a signal that some of these organizations will voluntarily disband. We fully expect each of these organizations to co-exist individually into the foreseeable future.
Teneo Takeaway: Don’t Forget About the Other Important Elements Within the ESG Ecosystem
The wide assortment of ESG ratings (e.g. MSCI), ESG rankings (e.g. JUST Capital) and ESG indexes (e.g. S&P ESG 500) do not appear to be directly impacted by the IBC Disclosure Project. Ultimately, it may empower the ESG ratings firms to develop new ratings and methodologies based on the IBC Disclosure Project. The ESG ratings market does not show any sign of slowing down, with several new ESG ratings emerging this year, including UN SDG impact scores from MSCI and ISS, as well as an entire suite of new ESG ratings from Bloomberg. Companies should continue to proactively monitor their ESG ratings and subsequent impact on their access to capital.
The Bottom Line
In the near-term, the IBC Disclosure Project can be a useful tool to inform company sustainability reporting. Over time, it is also possible that the IBC Disclosure Project could eventually provide companies with a standardized and singular ESG disclosure framework. However, investor support will be a critical component to its success. Until a majority of investors coalesce around the IBC Disclosure Project, we believe that companies should also continue to consider including the most prevalent ESG disclosure frameworks into sustainability disclosure strategies, such as SASB, TCFD, GRI and the CDP.
We will continue to update our clients on the developments within the ESG ecosystem. Please reach out to us with any additional questions or comments.