Sustainability reporting – bring the ethics!

As we addressed here, the International Sustainability Standards Board has issued its first two exposure drafts, General Sustainability-related Disclosures and Climate-related Disclosures, both open for comment until July 29, 2022.

Here’s an extract from a comment letter submitted by the International Ethics Standard Board for Accountants:

  • Sustainability reporting is increasingly important, not only in meeting stakeholder needs, but also in supporting capital allocation decisions. Global standards, including those relating to ethics and independence, provide an important guardrail against the risks of fragmentation and low quality or misleading information. These risks may be heightened in the context of sustainability reporting as the information is often forward-looking instead of historical, and is subject to higher levels of estimation uncertainty and volatility. In addition, sustainability information is often reliant on assumptions which may be highly subjective. There are further well-known challenges associated with widespread sustainability reporting in its nascent stages. For example, many companies lack mature systems, processes and internal controls to accurately collect and report the required information.
  • These challenges together with the pressures to report sustainability-related information at the same time as financial information could further exacerbate risks of issues such as “greenwashing” and “cherry picking”, undermining the credibility of the information and the quality of the assurance provided. Greenwashing is a significant public interest concern as it presents investors and other users with misleading information, thereby detracting from the goal of providing them with reliable decision-useful sustainability information. This reinforces the importance of anchoring the conduct and mindset of those involved in sustainability reporting in a robust Code of Ethics..

The letter’s “simple but important ask” is that “the ISSB take every opportunity to advocate the importance of high standards of ethical behavior, and the role and contributions of the IESBA Code in meeting the markets’ needs for trustworthy sustainability reporting. In so doing, the ISSB’s voice and support for ethics will help underpin public confidence and trust in information that is increasingly being used for capital allocation or other purposes by investors, customers, employees or potential employees, government agencies and other stakeholders.”

The “greenwashing” concern comes up over and over again in reporting or commenting on sustainability reporting, and with good reason – one can cite endless examples of entities (no less than governments and individuals) engaging in misleading virtue signaling, A recent New York Times opinion piece by David Wallace-Wells asked: What’s Worse: Climate Denial or Climate Hypocrisy, finding the answer to be a close call:

  • this basic phenomenon, in which powerful people make climate pledges that turn out to wildly outrace their genuine commitments, has now become so pervasive that it begins to look less like venality by any one person or institution and more like a new political grammar. The era of climate denial has been replaced with one plagued by climate promises that no one seems prepared to keep.
  • For years, when advocates lamented the “emissions gap,” they meant the gulf between what scientists said was necessary and what public and private actors were willing to promise. Today that gap has almost entirely disappeared; it has been estimated that global pledges, if enacted in full, would most likely bring the planet 1.8 degrees Celsius of warming — in line with the Paris agreement’s stated target of “well below two degrees” and in range of its more ambitious goal of 1.5 degrees. But it has been replaced by another gap, between what has been pledged and what is being done. In June, a global review of net-zero pledges by corporations found that fully half of them had laid out no concrete plan for getting there; and though 83 percent of emissions and 91 percent of global G.D.P. is now covered by national net-zero pledges, no country — not a single one, including the 187 that signed the Paris agreement — is on track for emissions reductions in line with a 1.5 degree target, according to the watchdog group Climate Action Tracker.
  • In trading denial for dissonance, a certain narrative clarity has been lost. Five years ago, the stakes were clear, to those looking closely, but so were the forces of denial and inaction, which helps explain the global crescendo of moral fervor that appeared to peak just before the pandemic. Today the rhetorical war has largely been won, but the outlook grows a lot more confusing when everyone agrees to agree, paying at least lip service to the existential rhetoric of activists…

It’s not hard to imagine how the current exposure drafts might add to this hypocrisy. Many commenters to date have expressed versions of this concern, such as Les Ateliers du futur:

  • we do not believe that the requirements contained in the Exposure Draft will achieve its essential objectives. Indeed, this reporting is based on a self-assessment by the corporation of its risks and opportunities with regard to the climate.
  • However, it is obvious that the required expertise and maturity is not yet universally widespread:
    • The complexity of the climatic, technological, financial and market environment is extreme, therefore difficult to apprehend even with stochastic models by a corporation regardless of its sector of activity,
    • Multiple factors generate conflicts of interest, often between short-term concerns or objectives and the medium/long term. For management by definition ephemeral, there is therefore a natural temptation to minimize long-term threats to favor perceived value in the short term…

Les Ateliers detects a lack of urgency to the project, relative to the scale of the challenge. I’ve mused along those lines several times in this space, and honestly, every week just provides another reason for depression (how for example is a country preoccupied by a savage abortion battle ever going to find its way to a sufficient sense of collective long-term purpose?). Those who cite business and market forces as a rational key to changing our trajectory (recall Emmanuel Faber’s “I’m an activist of business being part of the solution, being the fundamental solution, the solution”) surely underestimate the even more fundamental power of regressively manipulative political wrecking balls…

The opinions expressed are solely those of the author

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