Common sustainability accounting standards would meet the increasingly urgent need to simplify environmental, social and governance (ESG) reporting.
Sustainability reports have become commonplace in the past decade, with 58% of companies in America’s S&P 500 index releasing one compared to just 37% in 2011, according to Datamaran. These reports give firms the opportunity to substantiate their corporate social responsibility (CSR) practices with environmental, social and governance (ESG) data. Stakeholders can then evaluate performance with regard to sustainability, and use ESG criteria to assess risk.
The problem is that sustainability accounting standards vary greatly in the absence of globally or even nationally agreed-upon guidelines. The Reporting Exchange, an online platform for ESG reporting, tracks various ESG guidelines such as regulations and standards. Between 2009 and 2019, the number of different guidelines grew from about 700 to over 1,700, including more than 360 different ESG accounting standards.
Without standardization, investors must analyse data without the contextual understanding to make meaningful comparisons. Having no specific requirements, companies can easily cherry-pick data; they can also be bewildered by the options. Deciding what to disclose is difficult, leading many to call for a set of rules akin to the U.S. Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Competing interests and lack of consensus around sustainability accounting suggest a long road ahead.
Among the many existing standards, four have gained prominence, according to The Economist: The Global Reporting Initiative (GRI), which focuses on social and environmental impact; the Sustainability Accounting Standards Board (SASB), which looks only at factors having a material effect on performance; the Task Force on Climate-Related Financial Disclosures (TCFD) and the Carbon Disclosure Project (CDP), both of which prioritize climate change, in terms of companies’ exposure both to its effects and to potential regulations for curbing carbon emissions.
The most prevalent is the GRI, established in 1997 and used today by about 6,000 firms worldwide. This includes 40% of S&P 500 companies, according to Datamaran, though the SASB is starting to be adopted more widely in America. The TCFD is also growing in popularity, and has the backing of the Financial Stability Board, an international regulatory body.
Another set of ESG metrics was announced on September 22 by the World Economic Forum (WEF), in consortium with big four accounting firms Deloitte, EY, KPMG and PwC as well as Bank of America. The WEF describes it as a “universal set of stakeholder capitalism metrics including environmental, social and governance (ESG) indicators and disclosures for financial markets, investors and society.” The intent is not to invent new standards, but to simplify ESG reporting by synthesizing existing standards.
Also in September, five big standard-setters including SASB and GRI announced a plan to cooperate on measures. Various global organizations are also taking on this goal, including the IFRS Foundation. Movements like these indicate that simplification is taking on greater urgency in tandem with the growing importance of sustainability accounting and CSR overall.