Integra Audit & Accounting Alert

Major Milestone in ESG Reporting

World Economic Forum unveils broadly supported set of metrics and disclosures

This publication has followed the development of environmental, social and governmental (ESG) financial reporting criteria over the past decade. The January 2020 issue highlighted the history and progress of organizations and governmental bodies in their pursuit of the elusive goal of identifying and quantifying non-financial sustainability measures. More recently, the August 2020 issue reported the increasing urgency in this effort, arising from the new dynamics presented by the pandemic. The need for a universal framework and set of standards was emphasized.

As if prophetically, on September 22, 2020, the World Economic Forum (WEF) announced the release of a comprehensive set of metrics and disclosures for reporting ESG by companies. Development of the metrics and disclosures was led by members of the Big Four accounting firms, working together with a broad international coalition of representatives from the corporate, investor, regulatory, and nongovernmental community. A key factor was the involvement and cooperation of the five organizations most active in the ESG arena: the Carbon Disclosure Project (CDP), the Climate Disclosure Standards Board CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB).

The WEF metrics expand the three ESG factors into four pillars which are considered to reflect “universality across industries and business models:” 1) principles of governance, 2) planet, 3) people and 4) prosperity. As the report states: “The inclusion of prosperity as the fourth pillar takes this project’s work beyond simply “ESG”, highlighting the importance of prosperous societies and the role of businesses in fuelling economic growth, innovation and shared wealth.”

The WEF’s International Business Council presented the finalized set of metrics and disclosures in a white paper titled Measuring Stakeholder Capitalism, Towards Common Metrics and Consistent Reporting of Sustainable Value Creation. The findings are classified by the four pillars into 21 generally more established and quantifiable core metrics, and 34 less well-established expanded metrics. The white paper asks companies to report on as many of the metrics that are material and applicable to them, or explain why not. The ultimate hope, as expressed in a joint statement by the five organizations named above, is that the metrics and disclosures “form the natural building blocks of a single, coherent, global ESG reporting system.”

The detailed core metrics are laid out by the following themes within each pillar:

Principles of Governance – governing purpose, quality of governing body, stakeholder engagement, ethical behavior, and risk and opportunity oversight.
Planet – climate change, nature loss, and freshwater availability. Three additional themes, along with resource availability, fell into the expanded metrics: air pollution, water pollution and solid waste.
People – dignity and equality, health and well-being, and skills for the future.

Prosperity – employment and wealth generation, innovation of better products and services, and community and social viability.

To show the quantitative nature of the metrics, an example is taken from the Planet pillar. The first metric under the Climate Change theme is Greenhouse gas (GHG) emissions. The description for reporting is “For all relevant greenhouse gases (e.g. carbon dioxide, methane, nitrous oxide, F‑gases etc.), report in metric tonnes of carbon dioxide equivalent (tCO2e) GHG Protocol Scope 1 and Scope 2 emissions. Estimate and report material upstream and downstream (GHG Protocol Scope 3) emissions where appropriate.” The GHG Protocol is a widely used international tool for calculating greenhouse gas emissions. Scope 1 emissions are direct from owned or controlled sources, while Scope 2 emissions are indirect from purchased energy, and Scope 3 emissions are others that occur somewhere in the company’s value chain.

The white paper acknowledges that the coverage of the metrics is not comprehensive, nor meant to downplay more far-reaching reporting in use. For instance, Morgan Stanley has a well-established Institute for Sustainable Investing. In an article from July 2020 titled Climate Transition in a Portfolio Context:
What Matters and What to Measure, key climate metrics recommended in addition to carbon emissions are carbon intensity, emissions reduction target, carbon earnings at risk, and climate change revenues.

In a related development, on September 30, 2020, the International Financial Reporting Standards (IFRS) Foundation published Consultation Paper on Sustainability Reporting, to gauge the current state of sustainability reporting, whether the time is right for oversight, and how a proposed Sustainability Standards Board (SSB) established by the Foundation might function in conjunction with the International Accounting Standards Board (IASB). As stated by Erkki Liikanen, Chair of the IFRS Foundation Trustees: “Calls for standardisation and comparability of reporting on sustainability and climate-change issues continue to grow as these matters become increasingly important to capital markets. We therefore seek to assess whether there is demand for global sustainability standards and whether the IFRS Foundation should play a role in developing such standards.” The proposal has received support from leaders of the International Federation of Accountants (IFAC) and AICPA. The consultation is open for comments until December 31, 2020.

Further details can be found at Measuring Stakeholder Capitalism: Top Global Companies Take Action on Universal ESG Reporting and IFRS Foundation Trustees consult on global approach to sustainability reporting and on possible Foundation role.
(https://www.weforum.org/press/2020/09/measuring-stakeholder-capitalism-top-global-companies-take-action-on-universal-esg-reporting) and (https://www.ifrs.org/news-and-events/2020/09/ifrs-foundation-trustees-consult-on-global-approach-to-sustainability-reporting/).