By Shailesh Haribhakti and Thara TK
In the last two years, global agglomerations of capital represented by sovereign wealth funds, pension and provident funds, insurance funds, mutual funds, private equity funds and alternative asset funds have begun to demand a continuous monitoring of ESG (Environmental, Social and Governance) readiness. Quite apart from ESG diligence, there is an ongoing requirement to ensure that the delta capitals be allocated only if they conform to ‘Gross Zero’ norm. Join to this the powerful force of Generation Z demanding purpose and a workplace with soul. Reporting on ESG is no longer ‘nice to have’ but absolutely a distinguishing factor in appraisal of continuous investment worthiness of any enterprise.
As the momentum intensified, the five framework- and standard-setting institutions of international significance, CDP(Carbon Disclosure Project), the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) and the International integrated Reporting Council (IIRC) and the other players in the ecosystem such as World Economic Forum (WEF) and Taskforce on Climate-related Financial Disclosures (TCFD) crystallised their recommendations and frameworks. As more and more stakeholders got into the act, a bewildering array of options were put out for the financial community to figure out their own path.
The pandemic year witnessed significant activities in terms of key announcements, publishing and convergence effort in this space.
January 2020: European Commission (EU) sought stakeholder views on non-financial reporting standards.
April 2020: The International Organisation of Securities Commissions (IOSCO) acknowledged the role of regulators in providing necessary insights on sustainable finance to investors and governments.
May 2020: The International Monetary Fund (IMF) alerted investors that global mandatory disclosures on material climate change risks would be critical to sustain financial stability.
June 2020: The Institute of International Finance (IIF) demanded better ESG disclosures and the need for global framework.
September 2020: World Economic Forum (WEF) through its International Business Council (IBC), took the decisive step of getting the Big 4 accounting firms together and creating a set of universal, material ESG metrics and recommended disclosures. The resultant white paper, specifies that the metrics are drawn wherever possible from existing standards and disclosures, with the aim of amplifying the rigorous work already done by standard-setters rather than reinventing the wheel.
September 2020: The five standard setters announced a statement of intent declaring a shared vision towards comprehensive corporate reporting and their intent to work together towards it. The paper emphasizes that “the time is now”, the conditions are ripe and urgent for the development of a market-based and globally coherent solution for sustainability disclosure standards.
September 2020: IFRS (International Finance Reporting Standards) Foundation issued a consultation paper to identify the demand from stakeholders to create a new Sustainability Standards Board (SSB) under the governance structure of the IFRS Foundation to develop global sustainability standards.
November 2020: IIRC and SASB made the announcement of their intent to merge.
December 2020: The five standard setters published a prototype “climate-related financial disclosure standard”, demonstrating the commitment and urgency to work together towards the comprehensive corporate reporting system.
January 2021: IIRC launched revised IR (Integrated Reporting) framework, the first revision since its original publication in 2013. IIRC CEO Charles Tilley said “IR is doing the job it is created for, it is helping companies transform the way they think, plan and communicate about how they create value. The important part of our strategy for 2021 will be reinforcing IR outreach”. IIRC in its recent communications reemphasizes its commitment to globally accepted comprehensive corporate reporting, to its intended merger with SASB and also their intent that the comprehensive corporate reporting will embed the principles of integrated thinking and reporting within mainstream governance and practice.
It is clear that an era of convergence to talk a common language of ESG reporting is rapidly dawning. The global corporate community will embrace these standards in self-interest. While the pieces of the puzzle come together, “do not wait” is the call from standard setters. The frameworks and standards are at the disposal of corporate world to build on!
Let us take a look at the next logical steps businesses can take in 2021 to make the best out of these latest offerings and to prepare themselves to stay diligent and receptive to the transformative developments expected in this space in the coming years.
Contextualize the UN Sustainable Development Goals (SDGs) within the business charter, and identify for each of them the positive and negative impact the business actions are causing.
193 countries have signed up to deliver SDGs as the goals for humanity. If delivering SDG is fundamental to humanity, the purpose, goals and actions of international organizations, governments, corporates, communities and individuals also must align. They must work coherently under a universal framework towards achieving them. Each entity may have a different approach; may experience varying levels of relevance with respect to each SDG; and may use a different set of indicators to measure them. As the end purpose is common, it is imperative that actions as Key Result Areas (KRA) get cascaded to the simplest entity in value chain- the individual!
Materiality is key for corporates and sustainability is at its core. Most standards and practices currently in use limit corporates’ purpose for SDGs to mere mapping of the most obvious and positive business attributes to the related SDGs. There is a clear opportunity for materiality and laser focus here. Material roles, actions, targets and indicators must be deployed for each of the SDGs. A progressive approach is to identify every positive and negative impact of business strategy, business model and activities on each SDG and score them.
A candidate point of view on SDG purpose and interactions for corporates operating in developing countries is demonstrated below.
▪ Foundational SDGs; SDG 16 (Peace, justice and strong institutions) and SDG 17 (Partnership for the goals) are expected to be established by the government and international organizations for corporates to operate smoothly.
▪ Corporates to identify the business impact, both positive and negative, on the SDGs as relevant for the industry and business operations.
▪ Once the correlations are clearly tracked, the businesses can pivot their strategy and models towards maximising the positive impact while equally prioritizing and investing its efforts towards nullifying the negative impacts.
▪ Once the balancing strategy is laid out and ensured, the focus can then be directed towards maximising SDG8 (Decent work and economic growth) while keeping SDG 9 (Industry innovation and infrastructure) and SDG 12 (Responsible consumption as production) at the core of business operations.
▪ The targets and measurements for corporates SDG performance can then be fed into corporate ESG scoring systems and the contributory measurements can be rolled up to the respective government and global initiatives.
In the given example, the corporates’ contribution to each SDG can be individually added up to the national indicators. It can even provide the traceability of corporate contribution to a potential governmental priority such as to achieve Universal Basic Income (UBI) and Universal Basic Services (UBS) for all.
Depending on the purpose, scope and nature of businesses and the region/country of operation, the priorities of the larger entity and the resultant corporate role, actions, targets and measures can be determined. The whole process can be included in Integrated Reporting (IR) correlating them to the measures deployed, the outcomes achieved and the impact the outcomes have on the community served and the ecosystem addressed.
Integrated thinking and reporting are fundamental to the purpose of value creation; Adopt / improve Integrated Reporting
IR has seen significant traction and adoption across the globe in the last few years. Over 70 countries have acknowledged and adopted IR so far. Reported across 6 capitals (Financial, Manufactured, Intellectual, Human, Social and Relationship and Natural) and 8 content elements (Organizational overview and external elements, Governance, Business model, Risks and opportunities, Strategy and resource allocation, Performance, Outlook and Basis of presentation), IR stands out to be the only holistic and comprehensive framework that has the potential to replace traditional annual reports with significantly increased value, insights and transparency.
IR provides a principle-based approach striking the appropriate balance between flexibility and prescription. This approach creates the room for businesses to intertwine the prescribed measurements from any other framework or customized measurements from their own line of business smoothly into the holistic IR landscape. The recent framework revisions released by IIRC, almost after 8 years since the original launch, are focussed primarily on providing more quality, clarity and simplicity to the framework while retaining the fundamental concepts and building blocks unchanged. One can see how the foundations are clear and are here to stay.
IR not only helps the businesses to change the way they report, but also channels the businesses to reassess their business models, strategy and risks towards long term sustainable value creation.
Leverage the common metrics and disclosures delivered by WEF/IBC and Big 4, in the Integrated Reporting
The convergence effort by WEF/IBC and Big 4 has delivered a set of common metrics and disclosures that could be reflected in the mainstream reports by companies across industry sectors and countries. It does not provide a holistic end to end reporting framework or guidelines as IR does. These common metrics and disclosures complement holistic reports such as annual report and IR, by providing a solution for consistent and comparable measurements on sustainable value creation across organizations. It may be a good starting point to include these metrics in the “Input” and “Output” flow across the 6 capitals of IR.
The diagram below represents how SDGs and the metrics and disclosures recommended by WEF/Big 4 can be meaningfully incorporated into the IR framework.
These preparatory and progressive steps will keep corporates abreast on ESG reporting as the
convergence effort and universal systems get delivered in due course of time.
The world senses the insufficiency of historical financial reporting. Search is intensely on for
a simple, logical, easy to understand, report which will depict human efforts and outcomes.
The linkage between sustainability and purpose must be established!
Eventually, we will figure this all out! Just as financial reporting matured, policymakers,
regulators, international organizations, standard setters, foundations and boards, corporates,
investors and the whole ecosystem will find answers to enable purposeful sustainability
reporting and consumption. Much before and for a long time after we get there, we are bound
to take the parallel exhilarating journey of digital transformation of sustainability reporting.
The world should see the rapid emergence of a solution on clean, trustworthy, real-time data
led reporting. We postulate that Blockchain like technology will be deployed to create the
necessary authenticity and reliability. Extensive neural networks that can track and measure
activities and predict targets and outcomes on a timescale will connect every entity in the value
chain. This virtuous cycle will improve continuously based on feedback.
What gets measured gets managed indeed, key is to embrace purpose and means of
sustainability at core
While the reporting techniques mature and persuade the outcome, the true opportunity that
2021 presents is the clarity and vision for businesses to self-reflect and evolve at core to be a
sustainable entity.
Open yourself to:
▪ Adopting a mindset of abundance, exponentiality, transformative purpose and gratitude
and devise your moonshots with that mindset.
▪ Demonstrating the 6 Ds; Digitalize, Demonetise, Dematerialise, Delocalise, Disrupt
and Democratise in your plan.
▪ Thinking always of impacts in terms of economic, health related, social and
environmental.
▪ Reinventing, repurposing and recycling towards a circular economy.
The day is not far when value of sustainability will shoot past that of Bitcoin and Tesla in every
individual’s life. Countries will be ranked on their ESG rating rather than GDP. Businesses
will innovate and deliver products and services that compete first on their ability to enable
humanity to leave the planet a better place to live. Sustainable living and attitude will become
the ultimate status symbol. Carbon footprint will redefine brands. Our children will learn in
schools how our generation learnt it the hard way and retracted back to the path of sustainable
living and responsible consumption and they will best serve as the brand ambassadors of planet
earth.