Universal Reporting Standards – Pipe Dream or Panacea?
In recent years, stakeholder demand for environmental, social and governance (ESG) information has increased exponentially. Investors need clear, comprehensive, and comparable information to make informed investment decisions. Customers are paying progressively more attention to how their purchases impact people and the planet.
In response, attempts to produce — and increasingly to mandate — various sustainability-related reporting frameworks and standards have also multiplied. This has led to a growing set of overlapping frameworks that are often confusing and resource-intensive to engage with. Could the newly formed International Sustainability Standards Board (ISSB) reduce duplication and provide much needed clarity, or will it simply exacerbate the burden on companies already struggling to navigate the disclosure landscape?
We’re left with a vast patchwork of frameworks and standards, all with varying parameters:
Global or country-specific
Mandatory or voluntary
Finance-focused or broader
Covering all aspects of ESG or narrower
Aimed at one industry or multiple
Aimed at SMEs and / or large public companies
It’s pretty challenging to explain the current landscape of sustainability reporting standards in a clear, concise manner: it’s too complicated and there are far too many acronyms. How can businesses be expected to provide their stakeholders with clear, comparable and comprehensive ESG information when the task of simply choosing which frameworks to use is onerous, and the resources needed to gather the required information often seem disproportionate?
The strong drive for transparency and disclosure is certainly positive in itself, but the piecemeal way it’s happened over the last couple of decades is far from helpful. The need for a definitive alignment of standards is pressing.
New efforts to simplify
Arguably the most interesting recent development in the complex world of ESG disclosure standards is the creation of the ISSB, announced last year as an IFRS initiative, in collaboration with the leading group of voluntary standard-setters. The aim is to combine the existing frameworks to produce a comprehensive, global set of sustainability reporting standards.
There are several challenges that the ISSB will have to overcome in order to achieve this aim. First is the difficulty of a globally adopted framework – one study found that only the GRI can demonstrate widespread global implementation, with current use by 73% of G250 companies. Western Europe and North America generally dominate the ESG reporting landscape, despite being less populous and producing fewer emissions than the Asia-Oceania region. ESG is simply not a high priority in all countries, compounded by issues such as corruption and variable data quality. Global mandatory disclosures may simply not be successful unless supported by an effective global system of data verification.
In addition, the variation in global approaches to issues such as human rights can be controversial and politicised. Many companies operating across multiple markets already face political and cultural challenges when working to increase transparency. An effective global framework will need to accept and embrace these complex relationships and potentially recognise the strength of shared data and disclosures across groups of peers and mutual suppliers as a mechanism for moving the needle in a positive direction.
And what about small and medium enterprises (SMEs)? These companies make up around 90% of businesses globally, yet the vast majority of reporting standards are aimed at large and listed companies. While ESG information from SMEs is crucial to understanding the big picture of business sustainability, and to encourage good practice, the question of proportionality arises. Is it fair to request increasingly complex information from companies that may not have the resources to gather the necessary data? Perhaps the ISSB should consider having different disclosure requirements depending on the user – an approach currently under consideration for the SEC 10-K ESG Disclosure.
Reasons for optimism?
The ISSB has numerous challenges ahead if it is to produce a comprehensive set of standards for global sustainability reporting. There is, however, reason to be optimistic. Many major actors are supporting the ISSB, including the UN, the International Monetary Fund, G20 Finance Ministers, the World Economic Forum and IOSCO. The “building blocks” approach proposed for the ISSB, which accommodates for differing stakeholder views, will hopefully provide the necessary flexibility required to achieve its aim. It’s clear that any framework this ambitious will have to continually adapt to the plethora of differing global regions, stakeholders, industries and businesses. Let’s hope the ISSB can rise to the challenge.