The stage at the Asia Sustainability Reporting Summit was sizzling last week, despite Arctic temperatures in the conference room, as SASB and GRI battled it out in a fight entitled: My Standards are Bigger and Better than Yours.
In contrast to the restrained, optimistic rhetoric we have been used to over the past few years, SASB burst forth with a whoosh of self-aggrandizement, leaving GRI doing a jelly-wobble in disbelief. Of course, we shouldn't be all that surprised. SASB received a setback earlier this year when U.S. SEC Chairman Jay Clayton rejected ongoing and heightening pressure to make listing contingent upon (SASB-based) ESG disclosure:
In contrast to the restrained, optimistic rhetoric we have been used to over the past few years, SASB burst forth with a whoosh of self-aggrandizement, leaving GRI doing a jelly-wobble in disbelief. Of course, we shouldn't be all that surprised. SASB received a setback earlier this year when U.S. SEC Chairman Jay Clayton rejected ongoing and heightening pressure to make listing contingent upon (SASB-based) ESG disclosure:
"In a blow to several investor groups, SEC Chairman Jay Clayton recently said that he does not believe public companies should be required to disclose information concerning environmental, social, and governance (ESG) matters in a standardized format.
Clayton was especially opposed to requiring publicly-listed companies to use ESG standards developed by organizations like the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI), which some companies voluntarily use."
Denied SASB the dream, it was perhaps predicable that SASB, having based its entire strategy on becoming THE ESG disclosure tool for U.S. based companies, would not accept this without a fight.
At the Summit, which ran under the theme of "Is mandatory better?", both GRI and SASB came out forcefully in opposite corners of the two pivotal questions: Should ESG disclosure be mandatory? and Should ESG disclosure be based on the concept of financial materiality (rather than sustainability materiality)?
The showdown started as Tim Mohin, GRI's Chief Exec, took center stage, presenting GRI's position. He made the case for increasing mandatory instruments around the world, with 544 instruments tracking some form of mandated ESG disclosure in 85 countries and quoted a McKinsey study that showed 82% of investors and 66% of corporate executives surveyed preferred companies to be required to disclose by law. He explained that voluntary mechanisms are seen to work too slowly and don't cover enough of the market. Tim also quoted a study that indicated that mandatory disclosure has led to more efficient boards, less corruption and improved corporate credibility.
This was all going so well until he reverted to something that sounds like wishful thinking: "There is a belief in the marketplace is that there is confusion (around ESG disclosure standards). In fact, there is a lot of convergence....." Tim explained convergence by referencing the widespread use of GRI standards. But this is not convergence. It's a sort of Hobson's Choice: there is actually no other general standard for broad-based sustainability disclosures, and in any case, the quality of implementation varies so widely that it's hard to assess just how effectively GRI Standards are being used. At the same time, companies using or sort-of using GRI are also deploying other forms of disclosure, including CDP, TCFD, SASB, UNGC, sector-based standards and even SDG, to mention just a few. So let me be clear. THERE IS NO CONVERGENCE. It's time to stop saying that.
Tim went on to explain his testimony to the U.S. House of Representatives Committee on Financial Services earlier this year where he said that (1) ESG information is essential for the operation of capital markets and free trade; (2) This disclosure must be mandated and must be based on international, independent multi-stakeholder standards and (3) The concept of financial materiality does not work for ESG disclosure.
He said "I don’t think I need to convince anyone in this room that ESG disclosure is essential. We know that investors are demanding this information as it becomes more critical to investors and free trade. The last point is most important. We cannot rely solely on the test of financial materiality. If ESG issues were financially material, we would not have ESG issues. In fact, these issues are very hard to monetize. When we do monetize these issues, they often do not make the test of financial materiality." He has a point.
Tim Mohin even went into print this week (post-summit) to reinforce how increasingly worried he is that SASB has upped the ante:
"The movement to limit corporate disclosure on environmental, social and governance (ESG) issues to financially material topics (already legally required for public companies), has gained some momentum. If it catches on, it could roll back decades of progress. Even more troubling is that the advocates of this position brand themselves as working for environmental and social causes. Could this be a clever Trojan Horse to put the brakes on corporate responsibility?" Ta-da!
Following the GRI keynote, the Summit delegates then turned their attention to hear a very different story from Dr Madelyn Antoncic, SASB's new Chief Exec. SASB's proposition is about financial risk, market forces that incentivize corporations to make the choices that will cause investors to allocate capital to them. SASB believes that it is not regulation that will cause companies to improve and disclose ESG performance, but market forces and the promise of investor attention.
This was all going so well until he reverted to something that sounds like wishful thinking: "There is a belief in the marketplace is that there is confusion (around ESG disclosure standards). In fact, there is a lot of convergence....." Tim explained convergence by referencing the widespread use of GRI standards. But this is not convergence. It's a sort of Hobson's Choice: there is actually no other general standard for broad-based sustainability disclosures, and in any case, the quality of implementation varies so widely that it's hard to assess just how effectively GRI Standards are being used. At the same time, companies using or sort-of using GRI are also deploying other forms of disclosure, including CDP, TCFD, SASB, UNGC, sector-based standards and even SDG, to mention just a few. So let me be clear. THERE IS NO CONVERGENCE. It's time to stop saying that.
Tim went on to explain his testimony to the U.S. House of Representatives Committee on Financial Services earlier this year where he said that (1) ESG information is essential for the operation of capital markets and free trade; (2) This disclosure must be mandated and must be based on international, independent multi-stakeholder standards and (3) The concept of financial materiality does not work for ESG disclosure.
He said "I don’t think I need to convince anyone in this room that ESG disclosure is essential. We know that investors are demanding this information as it becomes more critical to investors and free trade. The last point is most important. We cannot rely solely on the test of financial materiality. If ESG issues were financially material, we would not have ESG issues. In fact, these issues are very hard to monetize. When we do monetize these issues, they often do not make the test of financial materiality." He has a point.
Tim Mohin even went into print this week (post-summit) to reinforce how increasingly worried he is that SASB has upped the ante:
"The movement to limit corporate disclosure on environmental, social and governance (ESG) issues to financially material topics (already legally required for public companies), has gained some momentum. If it catches on, it could roll back decades of progress. Even more troubling is that the advocates of this position brand themselves as working for environmental and social causes. Could this be a clever Trojan Horse to put the brakes on corporate responsibility?" Ta-da!
Following the GRI keynote, the Summit delegates then turned their attention to hear a very different story from Dr Madelyn Antoncic, SASB's new Chief Exec. SASB's proposition is about financial risk, market forces that incentivize corporations to make the choices that will cause investors to allocate capital to them. SASB believes that it is not regulation that will cause companies to improve and disclose ESG performance, but market forces and the promise of investor attention.
Madelyn said: "At first flush, it may be easy to jump to the conclusion that companies won't do the right thing when it comes to sustainability, especially when it will have short term negative impact on their bottom line. As an economist, however, I challenge that view. As I know that on occasion, economic agents, people, whether acting as individuals or on behalf of on behalf of organizations, or institutions, are motivated by incentives."
According to SASB, current sustainability disclosure does not cut it. (That's not a new assertion by SASB.)
According to SASB, current sustainability disclosure does not cut it. (That's not a new assertion by SASB.)
Madelyn added: "Yet while sustainability reporting has become near ubiquitous in recent years, the practice has widely been criticized for lacking the rigor of traditional financial reporting. A recent PWC report shows that 100% of corporations polled felt confident in the quality of their ESG information reporting while only 29% of investors polled were confident in the quality of that same information that they were receiving. More than 60% of corporations but only 8% of investors polled by Bank of America and Merrill Lynch during a recent congress thought that the ESG disclosure allowed for comparison among companies and peers."
My summary of SASB's view of the world is:
(1) Investors need corporations to provide reliable, consistent, auditable ESG information that is financially material by sector and by industry
(2) If they get this, they will act to allocate capital most effectively, rewarding good corporate citizens who show they are managing ESG risks
(3) The carrot of earning investor favor will keep corporations focused on good ESG performance and disclosure while the stick of higher risk and loss of reputation will do the same
(4) When all this happens, everybody wins.
Madelyn summarizes: "When we transform markets, we transform the world. .... What’s needed are incentives. Corporations need to be incentivized, to do the right thing because to do the alternative will negatively hit their bottom line. And only with consistent disclosure of financially material information, can investors be effectively the policing mechanism which will drive positive outcomes for the environment and society at large."
Ultimately, my reading of this is: Place your trust in investors. Let the money-makers and the money-takers decide what's best. Let money be the deciding factor in assessing corporate citizenship. If investors incorporate selected ESG factors in their decisions, so they can minimize financial risk, it will be good for everyone.
Well, sorry, but in my work in sustainability, I missed the bit where money was THE motivator for doing the right thing. I missed the bit where corporate transparency was ONLY about helping people make more money. I missed the bit where sustainability reporting has only ONE stakeholder group. When SASB was first formed, as an organization designed to deliver standards for financially material ESG disclosure in corporate annual reports, I could understand it. It was about helping investors understand and evaluate risk more holistically (even if they still don't quite know how to do it). It seems I am now hearing that voluntarily giving investors better ESG information is the key to delivering sustainable development and solving social and environmental issues. That's rather a lot of responsibility on the shoulders of those who are (only) managing financial assets.
The debate continued in the opening panel discussion which mainly focused on the chasm between GRI and SASB (sidelining the others present on stage). It went something like this:
He said:
Ultimately, my reading of this is: Place your trust in investors. Let the money-makers and the money-takers decide what's best. Let money be the deciding factor in assessing corporate citizenship. If investors incorporate selected ESG factors in their decisions, so they can minimize financial risk, it will be good for everyone.
Well, sorry, but in my work in sustainability, I missed the bit where money was THE motivator for doing the right thing. I missed the bit where corporate transparency was ONLY about helping people make more money. I missed the bit where sustainability reporting has only ONE stakeholder group. When SASB was first formed, as an organization designed to deliver standards for financially material ESG disclosure in corporate annual reports, I could understand it. It was about helping investors understand and evaluate risk more holistically (even if they still don't quite know how to do it). It seems I am now hearing that voluntarily giving investors better ESG information is the key to delivering sustainable development and solving social and environmental issues. That's rather a lot of responsibility on the shoulders of those who are (only) managing financial assets.
The debate continued in the opening panel discussion which mainly focused on the chasm between GRI and SASB (sidelining the others present on stage). It went something like this:
He said:
"Let’s face it, this movement started from a very different place – of activism, of trying to do the right thing, we call it corporate responsibility and now, because it has become quite clear that these non-financial matters have financial implications, we have the interest of the financial markets, But as I said, the fact is that externalities are not properly valued, and when they are, a lot of times they are still not financially material. There is a subset of ESG issues that are financially material, and frankly, in every jurisdiction I am aware of, financially material ESG issues ALREADY have to be disclosed, it's the law. Ethics, gender diversity, Scope 2 and Scope 3 carbon, water... many of these things just don’t ring the bell of financial materiality, but we know that they are absolutely critical"
She said:
"I would challenge that because at the end of the day, ethics, if you aren’t an ethical company, you go out of business, gender diversity, sooner or later, you go out of business, so that’s why they are called non-financial risks, I think it’s a ridiculous statement, non-financial becomes financial. The reason we look at financial materiality is the comparability – so many reports are now coming out in the ESG space, where investors say we can't make heads or tails out of this, and I can't compare one company versus the other, because they are not tied to some financial metric, that one company can be compared and therefore the capital can allocate to the different companies that are being good corporate citizens."
He said:
"The judgement of what is material can't be made by somebody else, it can't be made in the rear view mirror, it has to be made with a multi stakeholder approach, up front, that’s looking at a horizon that is typically much further than companies look at, not next quarter or next year, that’s not what ESG issues are about. We would never have looked at things like gender diversity – how do you value such things?
We don’t have gender diversity in the SASB standards. Scope 2, Scope 3 carbon are not financially material. These are things that if we don’t get a handle on, our society will be so much worse."
She said:
"I think there is a misunderstanding. Financial materiality, the way we look at it, it’s not next quarter, that’s the whole point and that’s what I mentioned, it’s about the long term. I think that any one of these issues that you mentioned .. of course.. sooner or later they are financially material.. and you mentioned that something is not in the SASB standards. Well, the SASB standards were only issued last November and now we are going through to look where we can improve.. as you know, these things evolve. I commend what your organization has been doing all these years and that’s great, but I think the world moves on. That doesn’t mean what we are doing today is wrong, it means we have built on the shoulders of what's been done, but we have to look at it now in a different way. Financial materiality and industry specificity makes it comparable .. and that’s why you see all these data providers coming up with their own interpretation and that’s why you see more and more of these so called standard setters - because no one can come up with a way that investors can make use of the information. It’s about how you come to the use of that information so we can mobilize all that capital."
He said:
"It’s just not true that this information isn’t getting to corporate boards and CEOs. I have done it personally. If you think Tim Cook doesn’t know about the supply chain issues at Apple, I can tell you I have personally briefed him many times. It is difficult and many companies aren’t in a position to understand this, it’s like trying to teach a fish to ride a bicycle. One of the things we're doing is forgetting about a key player in the marketplace and that’s analysts. Most of the analyst work is done on the back of GRI Standards, and it's used to compare companies."
She said:
"I didn’t say that Boards are not aware that they have supply chain issues. I am saying that the reports are not being done under the same standards as financial reports which means they are not signed off. As far as analysts are concerned, yes, there are lots of these data analysts, that’s the point, they are popping up all day, why? Because there are not robust reports that investors can use.. that’s why there is Sustainalytics, and RobecoSam and MSCI… and the list goes on. The reason is that the information is not consistent, it is not comparable, therefore these data providers are making inferences about what companies are doing and using analysts and coming up with the wrong answers. What we say is: use SASB standards, comparable, auditable. If the solution was what we currently have, without naming names, we wouldn’t have all these other things popping up."
He said:
"There is a lot of misleading information about the lack of comparability among analysts. In fact, in fact, it’s not meant to be comparable .. you can't just add up ethics, climate change and supply chain and come up with a number .. a lot of analysts cut it one way or another and they come up with different information because they are looking at different things. By design."
And by this time, the hundreds of delegates in the audience are starting to squirm a little at the way GRI and SASB are openly taking shots at each other (especially as the whole public rhetoric to date has been coochy-moochy harmonization and common purpose - remember the joint op-ed by Tim Mohin and the former SASB CEO, Jean Rogers?) In this dialogue of the deaf, both GRI and SASB are hyping themselves to their own downfall and missing the point. We do not need better standards. WE NEED BETTER IMPLEMENTATION.
GRI Standards could provide a good degree of comparability IF companies applied the standards in a quality way. The problem has always been that GRI has avoided any form of intervention in the way the standards are actually used and there is no consistent watchdog covering reporting accuracy or quality.
SASB Standards, which have not yet reached critical mass (any mass?) yet in terms of the number of companies fully using them, will only enable investors to get what they want IF the standards are IMPLEMENTED in a quality way. It's a little early for SASB to sing its own praises.
And if GRI and SASB and the other parties in the rather useless Better Alignment Project of the totally superfluous Corporate Reporting Dialogue pooled their resources to help companies apply GRI and/or SASB Standards in a complete and proper way, we would all get much further, much faster.
And as for mandatory, I think both GRI and SASB are wrong. They see the world too simply. One says YES to mandating ESG disclosure, the other says NO. I believe the answer is in the middle. Some things absolutely have to be mandated or they will never happen consistently across companies, industries and sectors. Others can be left to market forces, peer pressure, competitive appetite, stakeholder demands, investor self-interest. The real question here is not whether mandatory is better, but how much mandatory and which elements of mandatory would be truly effective. But GRI and SASB cannot see past their own ego and beyond their current legacy. GRI's overly positive hype about the status quo won't help us move forward. SASB's dismissal of everything that's not SASB is arrogant and misplaced.
I think it's time to refocus and reframe. We need to spend more time looking at the quality of what companies are reporting and less time in slanging matches about which standard is better. No current standard is perfect to meet the needs of a broader audience that uses ESG disclosure, not just investors. Instead of debating which one is less perfect, whether they should be mandated or not and which definition of materiality should apply, GRI and SASB should roll up their sleeves and get down to some serious work with companies and with each other to help drive better implementation of sustainable development practices and disclosure. If we do nothing more than ensure existing standards are fully adopted by all companies, consistently, auditably and comprehensively, perhaps with a few tweaks here and there, we will have done a lot.
GRI, SASB.... gauntlet over to you.
elaine cohen, CSR consultant, Sustainability Reporter, HR Professional, Ice Cream Addict. Owner/Manager of Beyond Business Ltd, an inspired Sustainability Strategy and Reporting firm having supported 100 client reports to date; author of three books and several chapters on Sustainability Reporting and the Human Resources connection to CSR; frequent chair and speaker at sustainability events and judge in several sustainability awards programs each year. Contact me via Twitter , LinkedIn or via Beyond Business
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