Opinion piece: Simplifying the Maze of Metrics?
30th November, 2020
Dr. Daniel Malan, Assistant Professor in Business Ethics at Trinity Business School, says that one of the things that we have learnt from the Covid-19 pandemic is that major change and rapid change are not incompatible.
The recent announcement of the merger between the International Integrated Reporting Council (the IIRC) and the Sustainability Accounting Standards Board (SASB) into the Value Reporting Foundation could be one of the most significant steps ever in the corporate reporting landscape, or it could cause further fragmentation in the name of integration.
If the merger is a serious attempt at consolidation, it will clarify some of the conceptual clutter and simplify the maze of metrics that producers and consumers of corporate reports have struggled with for decades. But if this is simply another strategic coalition to ensure the continued existence of both, it will confuse existing supporters and alienate possible new converts.
The merger is presented as a response to calls from global investors and corporations such as BlackRock to simplify the corporate reporting landscape. So far, so good. But to announce the creation of a merger and at the same time confirm that both the International <IR> Framework and SASB standards will remain “complementary tools” should ring an alarm bell or two. It reminds one of the reference to a “nested eco-system” made in the “Statement of Intent to Work Towards Comprehensive Reporting” which was published in September this year. This statement summarizes alignment discussions between five sustainability and integrated reporting organisations: in addition to the IIRC and SASB, participants included the CDP (formerly the Carbon Disclosure Project), the Climate Disclosure Standards Board (CDSB) and the Global Reporting Initiative (GRI).
The corporate reporting space needs real consolidation and integration. Quite frankly, we have run out of time for alignment only. We have slowly and painstakingly moved from global reporting (GRI, 1997) through integrated reporting (IIRC, 2010) to arrive at value reporting (Value Reporting Foundation, 2020). In response to the new Foundation, GRI Chairman Eric Hespenheide said, “GRI looks forward to working closely with the Value Reporting Foundation to continue progress towards the vision of a single, coherent system of corporate disclosure.” We have heard this one before. If this vision is shared by all stakeholders, why did the GRI not participate in the merger? Unless we start to see the disappearance of previous standards and organisations as part of the consolidation and simplification process, the cynics will be justified in viewing the use of terms such as “nested eco-system” as new-speak for turf protection and job preservation.
While simplification of the corporate reporting landscape is crucial, the need for a more sophisticated understanding of the complex landscape itself should not be negated. At the moment, the IIRC uses the six capitals model (financial, manufactured, intellectual, human, social and relationship, and natural), and SASB uses the five dimensions of sustainability (environment, social capital, human capital, business model and innovation, leadership and governance). However, environmental, social and governance (ESG) dimensions comprise the most widely used framework in the global investor community.
Whatever the nomenclature, if stakeholders don’t understand the concepts, the metrics will not help. The most recent Edelman Investor Trust Report, a survey of leading institutional investors, is a case in point. Edelman asks the following: “Do investors really care about Environmental, Social and Governance in the middle of a global pandemic? Or has the focus shifted back to the bottom line?” I find this question astounding. They might as well have asked the following: “Do investors really care about ESG in the middle of a climate crisis or has the focus shifted back to the bottom line?” One of the findings of the survey, according to Edelman, is that “investors have temporarily deprioritized ESG due to Covid-19”. The basic failure to identify a global health pandemic as an ESG issue should be of grave concern.
In addition to the pandemic, global markets have been impacted by ESG issues like financial crises, terror attacks and large-scale corporate fraud over many years. But there are too many analysts that fail to acknowledge these major movements in the markets as having been caused by ESG issues. They continue to focus their attention on the relatively insignificant discrepancies between the performance of all share indices and responsible investment portfolios.
The merger between the IIRC and SASB should be cautiously welcomed. But investors and corporations should reserve judgement until they see real evidence of integration and simplification. One of the things that we have learnt from the Covid-19 pandemic is that major change and rapid change are not incompatible. The Value Reporting Foundation should aim to achieve both.
Daniel Malan is a member of the World Economic Forum’s Global Future Council on Transparency and Anti-Corruption, and was the co-chair of the B20 task force on Integrity and Compliance 2020. He is an assistant professor in business ethics at Trinity College Dublin.
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