Last week, the NYT, reporting from Davos, said that the “business titans” at the annual World Economic Forum seemed to show a “newfound enthusiasm” for the cause of climate change, rallying “around a consensus that accelerating global temperatures pose a significant risk to society—and to business. Missing, though, was a clear answer to the question of what exactly they would do about it and how quickly. ‘It’s an increase in rhetoric, absolutely,’ said one commentator, ‘Will we see a walking of the talking? The jury is out.’” One way that a group of some of the largest businesses at Davos, together with the Big Four accounting firms, have been trying to “walk the talking” is through an effort “to develop a core set of common metrics to track environmental and social responsibility.” Is it just virtue-signaling or will the effort toward creation of new metrics make a difference?
Currently, companies that want to provide sustainability disclosure must decide among different reporting frameworks, such as SASB (Sustainability Accounting Standards Board) (see this PubCo post), TCFD (Task Force on Climate-related Financial Disclosures) (see this PubCo post), CDSB (Climate Disclosure Standards Board), GRI (Global Reporting Initiative), IIRC (International Integrated Reporting Council), and others. These frameworks provide a variety of standards and approaches, requiring companies to disclose somewhat different information—all of which creates an impediment to consistency and comparability. In addition, concerns have been raised that non-financial ESG information that may materially affect business performance and business risks “are not reported with the same discipline and rigor as financial information.”
The new initiative (currently in draft form), Toward Common Metrics and Consistent Reporting of Sustainable Value Creation, sponsored by the World Economic Forum International Business Council (comprising approximately 120 large multinational firms) in collaboration with the Big Four accounting firms, is an effort to address this issue. The initiative takes the opposite approach from that taken by the SASB framework (which provides separate sustainability accounting standards for each of 77 industries), instead seeking “to identify a common, core set of ESG metrics and recommended disclosures for all companies to report on, across sectors and geographies.” Another objective is to develop metrics and recommended disclosures that could be subject to “verification and assurance, further helping to raise the level of transparency and alignment among corporations, investors and all stakeholders with the goal of building a more sustainable and inclusive global economy.” And the report goes a step further in suggesting that companies “report on these metrics in their mainstream disclosures to provide a more accurate representation of a company’s performance, risk management capabilities and ability to generate long‑term value for all stakeholders.”
According to IBC Chair Brian Moynihan, the preliminary report
“proposes a common, core set of metrics and recommended disclosures that IBC members could use to align their mainstream reporting and, in so doing, reduce fragmentation and encourage faster progress towards a systemic solution, perhaps to include a generally accepted international accounting standard. To the maximum extent practicable, the report incorporates well‑established metrics and disclosures for the express purpose of building upon the extensive and rigorous work that has already been done by those who have developed the existing standards. The objective is to amplify those standards and more fully harness their synergies rather than create a new standard altogether.”
The report organizes the proposed metrics and disclosures into four categories: Principles of Governance, Planet, People and Prosperity. Within each category, there are two sets of metrics—core metrics, consisting of 22 well-established metrics that require primarily quantitative responses that “can be obtained with reasonable effort,” and expanded metrics, which are less well established and “have a wider value chain scope or convey impact in a more sophisticated or tangible way, such as in monetary terms. They represent a more advanced way of measuring and communicating sustainable value creation, and companies are encouraged to report against them as well, when material and appropriate.” The expanded metrics are designed to “help companies to progress towards greater depth, breadth and precision of reporting on the factors influencing long‑term value.” The report invokes a “comply or explain” approach, and encourages the use of balanced reporting of positive and negative effects.
In what might be a controversial aspect of the proposed framework, the report advocates that, instead of discussing the various metrics in a separate sustainability report, as seems to be the more common practice, the discussion should be mainstreamed. (Note, however, that the SEC has proposed to require that public companies provide a discussion of their human capital resources, which could involve discussion of similar metrics, as part of their narrative business discussions. See this PubCo post.) Because sustainability is “increasingly material to business performance,” the report contends, the related disclosures should be
“addressed in the mainstream report and proxy statements and integrated into core business strategy and governance processes. By reporting on these factors on a consistent basis in its mainstream report—including a discussion of their implications for company strategy and governance—a company demonstrates to its shareholders and other stakeholders that it diligently weighs all pertinent risks and opportunities in running its business, conducting its governance processes and contributing to broader economic and social progress, including achievement of the SDGs [sustainable development goals].”
Although the report disclaims any intent to discredit separate ESG reports, the report encourages IBC companies to begin reporting in mainstream corporate disclosures (annual reports to investors and proxy statements), using the core metrics as soon as they are finalized. In addition, the report advises that addressing ESG metrics in MD&A “will ensure that consideration of material ESG factors is on the board’s agenda and is part of the overall corporate governance process.”
The goal of the metrics and disclosures is “to identify universal disclosures that enable companies to demonstrate their long‑term viability and sustainable business practices.” The core metrics for the four categories cover the following topics:
- Principles of Governance addresses whether the company has a stated purpose linked to societal benefit and its core business, board composition, topics of stakeholder engagement, anti-corruption training and incidents, ethics advice and reporting mechanisms, and risk and opportunity oversight.
- Planet addresses greenhouse gas emissions (upstream and downstream where material), material climate risk and opportunities, land use and ecological sensitivity and fresh water consumption in water-stressed areas.
- People includes metrics related to ratio of remuneration of women to men, injury and absentee rates, diversity and inclusion data, wage levels, risks for child or forced labor and training provided.
- Prosperity includes metrics related to new employee hires and end employee turnover, levels of community investment in funds, in-kind contributions and time, net jobs created, net economic contribution, net investment, innovation in better product and services and country-by-country tax reporting.
More specifically, for example, the category of Principles of Governance includes the following as core metrics:
- “Governing Purpose: Whether the company has a stated purpose linked to societal benefit and its core business
- Quality of Governing Body: Composition of the highest governance body and its committees by: executive or non-executive; independence; tenure on the governance body; number of each individual’s other significant positions and commitments, and the nature of the commitments; gender; membership of under-represented social groups; competencies relating to economic, environmental and social topics; stakeholder representation
- Stakeholder Engagement: A list of the material topics identified in the process of defining report content and how they impact stakeholders
- Ethical Behavior (Anti-corruption):
- 1. total percentage of governance body members, employees and business partners who have received training on the organization’s anti-corruption policies and procedures, broken down by region
- 2. total number and nature of incidents of corruption confirmed during the current year but related to previous years
- 3. total number and nature of incidents of corruption confirmed during the current year, related to this year
- Ethical Behavior (Protected ethics advice and reporting mechanisms): A description of internal and external mechanisms for:
- 1. seeking advice about ethical and lawful behavior, and organizational integrity
- 2. reporting concerns about unethical or unlawful behavior, and organizational integrity
- Risk and Opportunity Oversight: Company risk factor disclosures clearly identify the principal risks facing the company specifically (as opposed to generic sector risks), the Board appetite in respect of these risks, how these risks have moved over time and the response to those changes. These should include discussion of data security and other emerging principal risks and should disclose the number of data breaches in the reporting period.”
As noted above, the report distinguishes between core metrics and expanded metrics, a kind of “stretch” reporting goals. For example, under the category “Planet,” the report indicates that the group of core metrics “relate corporate activities to the most material and pressing environmental issues for society as a whole—climate change, nature loss and the availability of clean, fresh water. Of these, climate change is perhaps the most universally material theme and is certainly the most advanced from the perspective of current corporate reporting. Nature loss will be particularly relevant for firms with agricultural operations, supply chains or customers, and similarly water consumption will be material for firms with significant operations, supply chains or markets in water-stressed areas,” such as California.
The expanded metrics for “Planet” include additional topics: air pollution, water pollution and solid waste, as well as “a measure of resource circularity to assess progress towards a circular economy business model.” In addition, the expanded metrics request reporting of material environmental impact of these metrics “along the full value chain (or ‘lifecycle’) of products or services. Individual businesses often operate in a small section of the overall value chain—for example, many major businesses focus solely on resource extraction, or on product manufacturing, or retail sales. However, these businesses rely on the continuing commercial viability of all preceding (upstream) and subsequent (downstream) parts of the value chain to sustain their own commercial success.” These environmental impacts can “present a threat to long term value creation.”
The report itself includes excellent tables showing the various core and expanded metrics under each category.
Hat tip to Robert Hirth of Protiviti.
(Note: modifications in quotes from the original to reflect Americanized spelling)