Sustainability standards: a bumpy road ahead without a north star

For those of us working in corporate sustainability, the past few weeks have been about as exciting as it can get. After a year-long consultation process, the European Commission last month launched its revised Corporate Sustainability Reporting Directive (CSRD), setting out new, ambitious guidance for how companies should disclose sustainability-related information. And while this may not seem like a big deal, it represents a critical step forward in the movement towards global standards that can help to increase corporate transparency and accountability on the issues that matter most for a more inclusive, sustainable, and just future.

Recent developments – from the escalating climate crisis, to racial injustice, to the ongoing COVID-19 pandemic – have highlighted the indispensable role that companies have to play in advancing solutions that positively impact people and the planet. At the same time, society is increasingly demanding that companies act. This convergence of shifting societal expectations has resulted in a massive need for companies to better understand how they can disclose their sustainability performance in a way that meets the needs of the various stakeholders with which they engage. And regulators around the world are responding, signalling a fundamental shift in the way that policymakers engage with business. But there’s a potentially bumpy road ahead.

Moving to Mandatory

While Europe has gone the furthest and the fastest on this agenda, we’ve seen a dramatic rise in proposed policy interventions to address sustainability reporting on almost every continent. From efforts to propose a sustainable finance taxonomy in Singapore, to new Environmental, Social, and Governance (ESG) reporting requirements for publicly listed companies in India, to continued iterations on integrated reporting guidance in South Africa, momentum is building. Even the United States – long considered a holdout for progressive action on corporate sustainability – has announced bold commitments aimed at advancing American leadership on these issues, including via proposed mandatory climate disclosures, which the US Treasury has also signalled support for.

Beyond regional efforts, we’ve also significant progress globally, with the International Financial Reporting Standards (IFRS) Foundation calling for an acceleration in efforts to promote convergence in global sustainability reporting standards. The International Organization of Securities Commissions (IOSCO) has also called for the creation of a Sustainability Standards Board (SSB), under the governance of the IFRS Foundation, that would help to ensure international consistency in sustainability-related disclosures. To facilitate this, IOSCO has already signalled its willingness to convene a multi-stakeholder committee of experts to consult and advise the proposed SSB on the topics that matter most to people and planet.

Such developments are hugely welcome. Whilst we are seeing more and more companies making huge strides in sustainability reporting, their efforts are often fragmented, serving as the exception rather than the rule. Taken together, the private sector is falling well short of the critical mass we need for systemic transformation. That’s why we need to shift from voluntary to mandatory reporting requirements that put all companies on a level playing field. Competitive capitalism means some will always innovate and raise the bar. But we urgently need a baseline of consistent, comparable, and reliable data to better allow us to assess the needs and opportunities for companies operating in this space. And whilst disclosure is not the same thing as impact, it’s a useful first step for all stakeholders to better hold companies to account.

Regulators, however, aren’t in the business of inventing new metrics, nor should they be. What’s needed is more clarity on the type of information companies should be reporting. But there’s some good news on the bumpy road in that regard.

Harmonization of Standards

Over the last decade, an increasing number of organisations has been working to address this challenge. Critics sometimes refer to an ‘alphabet soup’ of organisations, and with acronyms that include GRI, SASB, CDP, CDSB, UNGC, and – of course – WBA. Many are confused about how the work of these organisations either converge or differ. Fortunately, the winds are shifting strongly towards greater alignment.

Two of our Allies – the IIRC and SASB – recently merged into The Value Reporting Foundation. CDSB may follow. These three were also joined by CDP and GRI in a landmark Statement of Intent to work together on aligning approaches to corporate reporting. And through the Impact Management Project, we detect real energy to collaborate further and better explain how standards complement and build upon each other. This harmonization makes our job to benchmark company performance easier. It’s why we always reference and build on the work of all of our Allies – and make all our work is publicly available for others to do the same.

But behind this harmonization lies a renewed recognition of the different lenses through which these organisations look at companies, their stakeholders, and their role in the world. SASB Standards, for example, are designed to help companies identify financially-material information for investors. For others, such as GRI, the starting point is impact and reporting for a broader range of stakeholders. Some issues cross between the two – sustainability differs from financial reporting precisely because what matters is not always clear cut and, crucially, the important of issues changes over time. For example, issues that may not have been financially material to a company pre-pandemic may very well be now given the impact that COVID-19 has had on entire value chains. Ten years ago, tax was not on the agenda (outside of the finance department, who just tried to minimise it). Now, few fail to acknowledge its legitimacy as an issue for sustainable development.

Whether an issue is financially material or not may depend on your time horizon too – short-term fluctuations in share prices are not the same as long-term value creation. This is a fundamental perspective that underlies our work at WBA, which is premised on the idea that company impact is shaped by a wide range of stakeholders, all of whom benefit from transparent, consistent, and comparable information on company performance. And while investors play a critical role in influencing companies, we see every day – through our multi-stakeholder Alliance – that the needs of civil society, governments, employees and the media are also a vital ingredient in holding companies to account.

But here’s the irony. Just as standard setters are harmonizing and sharpening their focus, regulators are stepping into this huge debate over enterprise value (for investors) compared to impact (for multiple stakeholders). The European Union has embraced the idea of double materiality by mandating that companies address enterprise value as well as broader impacts. Meanwhile the IFRS Foundation looks set to focus on the needs of investors (although the Trustees have recognised a need to take a short, medium and long-term time horizon).

This potential divergence is absolutely fundamental to how regulators perceive the role of companies in society. But it also risks creating a patchwork of different requirements. Imagine the multinational corporation listed in New York, operating in Europe that raises finance in Asia. Which standards should the business prioritise in its reporting? Beyond the practicalities behind how this would function, the big question we should all be asking is whether we can all at least align on a shared vision for the role of the private sector in sustainable development. Such a shared vision should naturally align the intention (if not the specific details) of reporting standards and guidance.

A North Star for Quality Reporting

Regulators and reporting organisations all need a North Star. Some divergence is healthy in the dynamic landscape of sustainability. But aligning behind a common agenda for business’s role in society provides focus and long-term stability.

The good news is that we don’t need to invent (yet another) standard! In 2015, 193 countries came together to adopt the Sustainable Development Goals (SDGs). The SDGs paint an urgent and compelling picture of the role for the private sector in helping to solve the world’s greatest challenges. And while they offer a roadmap for collective action, they also have a limited runway for success. With just 9 years left to deliver the SDGs, we urgently need to build consensus around how best to ensure that companies have the tools and guidance they need to contribute meaningfully to driving change. This is even more important in the aftermath of the pandemic, which has threatened to reverse important gains we’ve already made and highlighted the need to continue holding companies accountable for their role in curbing climate change, protecting local communities in supply chains, and ensuring inclusive and equitable workplaces.

Last month, UN Member States signaled their support for this approach by calling for “globally consistent and comparable international standards for sustainability-related disclosure” aligned with the SDGs following the annual Financing for Development Forum. We couldn’t agree more. If we want to ensure that sustainability reporting is consistently high-quality, globally aligned, and focused on impact, the SDGs need to be front and center.