Toward comprehensive corporate reporting, if not a better world

Five “leading sustainability and integrated reporting organizations” have issued Statement of Intent to Work Together Towards Comprehensive Corporate Reporting, a summary of alignment discussions.

The five are CDP, the Climate Disclosure Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council and the Sustainability Accounting Standards Board. Here’s an extract from the introduction

  • Corporate reporting is a means by which stakeholders, including investors, can understand and evaluate companies’ performance, just as companies themselves use information internally to inform decision-making. Financial reporting has matured as a result of internationally recognized accounting standards that bring transparency, accountability and efficiency to financial markets around the world. Sustainability disclosure is necessarily more complex than financial reporting for a number of reasons:
  • Some users of sustainability information, such as providers of financial capital, share the same primary objective as users of financial information – namely to make economic decisions. However, there is a variety of other users and therefore objectives of sustainability information. It is important that a company recognizes this when determining which sustainability topics to disclose performance on, as well as in the choice of communication channels.
  • The nature of sustainability topics, including their interest to different types of users of information and their influence on companies’ performance, can also change, sometimes slowly but sometimes rapidly. We refer to this concept as “dynamic materiality”2 .
  • There is a common misperception that conflates sustainability information with the expanding eco-system of related ratings, indices and analytical tools, which rely on its disclosure.
  • Taken all together, these features have created confusion among producers and users of sustainability information – and have made it harder to develop the comprehensive solution for corporate reporting that is urgently needed.

The report asserts that “conditions are ideal for rapid progress” and that “the time is now,” and goes on:

  • We believe that the conditions are ripe for the development of a market-based and globally coherent solution for sustainability disclosure standards. Climate change, the global pandemic and the increasingly clear connection between sustainability performance and financial risk and return are driving the urgency. Stakeholders across the eco-system have recognized this and, through the various initiatives and calls for action from many players, including policy makers, there is a groundswell of support for a system change. Meanwhile, the increasing collaboration among the standard-setters and frameworks themselves offers an opportunity to greatly accelerate progress. As leading independent global framework- and standard-setters for sustainability and interconnected reporting, our efforts are natural building blocks for progress towards a comprehensive corporate reporting system.

However, the report doesn’t seem to contain any specific timelines or targets, such that the concepts of rapidity and urgency must apparently be applied loosely.

The report states that this initiative is “urgently needed to improve enterprises’ contribution to sustainable development, to help address climate change and to enable more resilient, efficient financial markets.” But as we’ve noted before, the axiom “what gets measured gets managed” may be problematic in this context. There’s little doubt that some entities could plausibly claim to better control the adverse environmental implications of their activities, as a result of having a way of quantifying those impacts, and then setting targets and monitoring progress relating to them. On the other hand, most of us can recall examples from our past or present work lives of how the drive to meet numerical targets can be counterproductive, at worst ignoring or even undermining their underlying point.

But that aside, this is mostly about financial markets. To put it bluntly, as environmental conditions and long-term prospects steadily get worse, the task of picking investment winners and losers will become increasingly strained, increasing the need for a common reference point. But this doesn’t necessarily mean that (for instance) chronic polluters and all-round environmental criminals will be severely punished by the market, only that the risk-return opportunity they exist, relative to their then-current stock price, will be tricky to evaluate (for instance, in determining when to get out before the whole thing collapses). And this leads to the fundamental problem – that the goal of enabling more resilient, efficient financial markets, assuming an aspect of the desired resiliency is that they continue to make money for those who participate in them, is almost certainly inherently inconsistent with that of addressing climate change. Further, we’ve seen this year how covid-19 (which in its perverse way has made at least some contribution to the fight against climate change, by plucking planes out of the sky and so forth) has only allowed market returns to persist at the price of chronically increased inequality and debt burdens. It’s foreseeable that stock markets will continue to have less and less to do with general prosperity and well-being, and that the game of doing well in them will become largely abstract and disconnected, played by its own hermetic rules, their connection to the decaying real world largely illusionary. Whatever the participants believe their current project may achieve, its main legacy may only be to fuel the continuation of that dynamic…

The opinions expressed are solely those of the author

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