By Tamara O’Brien, TMIL’s roving reporter
Can there ever have been a gloomier start to the normally joyous season of mellow fruitfulness? Well yes – after all, it’s not the 1940s. But in every other respect, it’s hard to find the positive in this autumn’s basket of deplorables. For many Brits, the death of the Queen has added a disorientating emotional twist. The mood was captured by a woman queuing to see the Queen’s lying-in-state, who said: “Somehow, I feel a little bit less British”. But, onwards and sideways, as they say. And on the panel for this quarter’s webinar, we had three people doing a lot of heavy lifting in the effort to improve reporting on – and thus companies’ performance on – environmental, societal and governance (ESG) issues.
First, the bad news…
Having referred to the umpteen horsemen of the apocalypse currently on World Tour, Claire opened the discussion by acknowledging their undeniable challenges to considering ESG issues as part of determining companies’ value. Challenges that the usual pundits have not been slow to notice.
‘Three letters that won’t save the planet’, blared The Economist a few months back. ‘ESG is a sham’, blasted The New York Times more recently. ‘ESG is a scam’, snarked the ever-helpful Elon Musk.
And Claire could see their point. Without a generally accepted set of principles around what ESG means, let alone ways of measuring its impacts, it’s unsurprising that some ESG investing is indeed pure greenwash.
But that doesn’t mean the whole concept of investing to support a wider interpretation of value and long-term sustainability is fake. Even the most rose-tinted assessment of our environment, of society, and of the way companies are run, would conclude that things are only getting worse. Also, that decline can be swift. Odd to think that, less than a year ago, many of us had reasonable hopes of a post-pandemic bounce back. Now we’re fearful for the roofs over our heads.
Nevertheless, in these panicked times, a more considered approach to investment is at risk of being thrown out wholesale, especially in the US.
So bodies dedicated to pushing the ESG reporting agenda forward – like the ISSB, the International Accounting Standards Board (IASB), the EU’s EFRAG, and numerous others – need to act boldly, swiftly and concertedly.
Rather like the classical heroes of yore, in fact. And as we discovered, each of our panellists approaches the quest from their own angle.
Into the labyrinth
In January’s ISSB discussion, Jonathan Labrey – who leads the ISSB’s connectivity and integrated reporting effort for the IFRS Foundation – detailed the complex journey undertaken to date in consolidating how companies should report on ESG. ‘Consolidation’ means getting agreement on consistent, comparable standards, across jurisdictions – which is what society and the financial markets are clamouring for, and why the ISSB was formed in the first place. But just because everyone wants it doesn’t mean they agree on how to deliver it.
ISSB is working with IASB to ensure consistency of concepts and terminology, and to encourage adoption by reporting jurisdictions all over the world. With the multiplicity of voluntary standards produced, developed, replaced and argued over for the last ten years, that’s some task.
But every quest needs heroes like Jonathan, brave enough to enter this labyrinth and rescue the imperilled princess – who in this story rejoices in the name of Connectivity. It is her destiny to help provide the joined-up information that will enable investors, and all of us, to assess the effects of sustainability on value creation. And thereby save the world.
Jonathan has support. There’s been a record response to the two exposure drafts he announced in the previous webinar. These drafts are aligned with the four pillars of the Taskforce on Climate-Related Financial Disclosures (TCFD), and Sustainability Accounting Standards Board (SASB) standards – so, no wheel-reinventing here. In fact, the many companies already using these standards have a head start on the ISSB standards to be introduced over the next few years.
That’s as far into the labyrinth as I can go here. Where else do our ESG protagonists find themselves?
A cottage in the woods
Peer through the grimy window, and you might see Prof Bob Eccles bouncing thoughtfully upon three beds. When he gets to the final one, his face lights up – he’s finally found the set of reporting standards that’s Just Right, and nailed to the headboard is a heart-shaped sign saying ‘ISSB’.
Well, he did refer to Goldilocks in his opening remarks…
On a more serious note, Bob also has experience of the less fluffy side of ESG… which brings us to:
The bearpit
‘It’s crazy what’s going on with ESG,’ he says. ‘There’s an ideological war. The sustainability people hate ESG because it’s only single materiality [ie only considers impacts of ESG issues on companies, not the companies’ impacts on the ESG issues facing society]. Then you’ve got the sustainability flat-earthers, my friends in the Republican Party, who consider ESG a woke, left-wing movement jamming their agenda down the throats of asset managers, and trying to destroy the American energy industry.
‘The term ESG comes with so much baggage – partly because of opportunists coming out with funds and saying, “Hey, with ESG investing, not only can you make more money, you can make the world a better place!” It’s nuts. There’s trade-offs. We need to get away from this rhetorical war.’
Bob has first-hand experience of this. In the summer, he found himself in a vicious war of words over an article he wrote for the Harvard Business Review: an innocuous exposition, as he thought, of why companies should support the ISSB. Nevertheless, he’s optimistic that companies ‘basically get it’ – and, in the face of possible opposition to the ISSB standards becoming law in the US, may adopt its principles anyway.
Wrestling with the numbers
Heroes can be of the unsung variety too, and in that regard there can be few less sung than the management accountant. But as Jeremy Osborn pointed out, it’s their determination to provide reliable information, get into the nitty gritty of disclosure metrics, and understand the connectivity between non-financial metrics and financial ones, that will make meaningful reporting on ESG issues possible. After all, what we need to understand is how these issues affect a company’s value – and who more qualified to help with that analysis than these good folks?
Jeremy spoke of the ‘information value chain’ – a way of conceptualising how this information gets used, from production to consumption – and how accountants are, or should be, heavily involved at all stages. Management information is used for internal decision-making; it’s reconciled with information that’s published externally, and audited and assured; and after going through consultancy and other services, gets into the hands of users. And those users are not only the investment management industry, who are managing funds primarily for the pension providers, but also supply chain organisations, customers, government, employees, regulators… in other words, society.
Key to all this is trust – that the information is reliable and robust enough to support the identification of an organisation’s material sustainability issues; and to demonstrate how it creates or reduces value, financial and non-financial.
The box
You can’t talk about myths and legends without referring to Pandora. So in a world of chaos, here’s the butterfly of hope: that there are champions prepared to do the hard yards, and to take on the dissenters, the feet-draggers, the downright deranged. And if that doesn’t give comfort and inspiration, I don’t know what does.
The denouement
What words of wisdom would our ESG heroes pass on to companies, in anticipation of the coming ISSB standards?
Jonathan: Embedding sustainability into your business, products and services – and reporting openly and transparently on it – is how you show investors you’re setting yourself up for the long term. You can’t afford not to!
Bob: You don’t need to wait for the regulations, just get on with it – jump on the process!
Jeremy: Non-financial information must be as robust as financial, so audit firms – upskill your auditors so they have a solid working knowledge of sustainability issues; and get subject matter experts (in climate change, for example, or water scarcity) onto your teams.