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As Sustainability Frameworks Multiply, Navigating Them Becomes a Concern

Chris Gaetano
Published Date:
Jul 16, 2019


Editor’s note: This is the first in a projected three-part series about the corporate sustainability movement.

Sustainable business practices, once largely an afterthought in the corporate world, are growing in significance, as more companies become aware of how environmental, social and governance (ESG) factors affect their bottom line. This development has sparked a rising demand for clarity on where companies stand on these issues and what they’re doing to improve these wide-ranging practices. Seeking to meet this demand are dozens of organizations that arose to provide various frameworks for measuring sustainable corporate behavior.

This enthusiasm, however, has prompted some leaders within the corporate sustainability movement to express concern that the sheer number of frameworks is hurting the comparability and usefulness of the information, and confusing investors. Hans Hoogervorst, chair of the International Accounting Standards Board (IASB), voiced this concern in a recent speech at Cambridge University.

“There are simply too many standards and initiatives in the space of sustainability reporting,” he said. “This leads to a lot of confusion among users and companies themselves. To give one example, Tesla is ranked highest in terms of the sustainability index of [investment research firm] MSCI, while [the Financial Times Stock Exchange 100 Index] ranks it as the worst carmaker globally on ESG issues. Yet another agency puts it somewhere in the middle. People may be forgiven for not making heads or tails of it.” He added that there are at least 230 corporate sustainability standards initiatives across more than 80 sectors today.

In a recent interview with The Trusted Professional, Madelyn Antoncic, the CEO of the Sustainability Accounting Standards Board (SASB) Foundation, raised a similar concern.

“When one considers the overall universe of sustainability information that could be relevant for all corporate stakeholders, it can seem overwhelming,” she said.

David Parham, the SASB’s director of research, said that the range of standards can be a problem for people in all parts of the sustainability community.

“For the reporter, it can mean a recalculation at best, and the collection of entirely different underlying data, at worst, depending on each framework’s requirement,” he said. “For the user, unless it is apparent that data has been calculated on a different basis and the underlying methodologies are clearly and transparently articulated, this can make it difficult to compare, and therefore, to make decisions regarding variable performance on a given factor.”

Renee Mikalopas-Cassidy, a past chair and current member of the NYSSCPA’s Sustainability Committee, who wrote her master’s thesis on sustainability accounting, noted that a lot of the confusion has to do with the fact that many of these frameworks look at different metrics for different audiences. Some, like the Carbon Disclosure Project,  are focused on a single area, while others, like the International Integrated Reporting Council (IIRC), are broader; some, like the Global Reporting Initiative, follow a public good-oriented model model, while others, like the SASB, focus on the company itself. These disparities can make it difficult to come to a definitive determination as to whether a company is sustainable, although Mikalopas-Cassidy said that such a binary approach was unrealistic anyway.

“I think that part of the problem is that a well-rounded company, like a well-rounded person, needs a lot of different skills,” she said. “It’s not black and white. Companies are the same way. A lot of frameworks have started to develop, and they are in some respect in competition with each other, but they also have different areas of focus and different approaches.”

She noted that this multiplicity of frameworks can also affect practitioners who want to get more involved in sustainability accounting, noting that the field can be so broad in scope that CPAs don’t always know where to start. She said that she tells people to start with what they’re most interested in, whether it’s the environment, gender equity, governance or something else.

Ilene L. Persoff, the current chair of the Sustainability Committee, said it can be similarly confusing for clients that want to become more sustainable, particularly if they are small or medium-sized businesses that don’t have the resources of a large multinational. For these types of companies, Persoff said that she is a big proponent of the U.N. Sustainable Development Goals (SDG) framework, which is focused on fulfilling objectives in areas such as the environment, poverty, gender equality and labor rights, which are easier to understand, and whose targets and activities are easier to implement.

“SDG goals encompass areas that small and medium-sized enterprises can really look at in their companies,” she said. “Take Goal 8: decent work and economic growth. That’s your workforce, right? ... There are a lot of companies that do good things for their employees, which they can measure, and about which they can inform their community. I think that companies that fear sustainability reporting don’t understand that they can start with things that are really manageable, if we go to the common-sense piece of it for smaller enterprises.”

Parham said that, ultimately, this overall confusion can be addressed by better understanding an organization’s reporting objectives, the specific needs of the end user, and the different tools available to help. While these organizations are all going toward the same goal of a more sustainable corporate sector, each presents different tools for different situations.

“For example, there are many tools someone can use to hold two things together—with tape, with nails, or with paper clips, to name a few,” Parham said. “While someone may have the same goal in each instance—to fasten two things together—depending on the objectives of the user of these tools, each may be appropriate and uniquely helpful under certain circumstances. You wouldn’t use nails to put wrapping paper on a gift box, and you wouldn’t use tape to hang drywall. Context is crucial.”

The drive to align

In order to address the issue of differing standards, five major sustainability organizations—the Carbon Disclosure Project, the Climate Disclosure Standards Board, the Global Reporting Initiative (GRI), the SASB and the IIRC—plus the IASB and the International Standards Organization (ISO), have come together to enact what’s called the Better Alignment Project.

Hoogervorst, in a later interview, pointed to the success of International Financial Reporting Standards (IFRS) as a reason to pursue further alignment. He noted that IFRS standards are now required in more than 140 jurisdictions, which, he said, “show[s] how attractive global consistency is for both preparers and users of financial reports.” Although, in his earlier speech he expressed skepticism that the IASB would get directly involved in sustainability accounting, he said it can lend valuable experience as a partner.

“The IASB has long experience in engaging stakeholders in our standards-setting work, which is crucial to creating the highest quality IFRS standards possible,” he said. “Working with stakeholders in a transparent and inclusive way is a good recipe for finding solutions that meet the needs of different groups.”

The project, conceived as a two-year effort, aims to minimize differences where they do not serve the needs of their target audiences by identifying commonalities among them. Formally announced at the end of last year, it will also identify how nonfinancial metrics relate to financial outcomes and how they can be integrated in mainstream reports. At the moment, the project is focused on aligning standards with the recommendations published by the Task Force for Climate-Related Financial Disclosures, whose stated mission is to “develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.”

But Georg Kell, chairman of Arabesque, an Anglo-German ESG asset management firm that uses quantitative investment strategies, said that, despite the project’s intentions, there’s a limit to just how aligned these different frameworks can ultimately be. He was skeptical that there will be anything close to a genuine alignment in the immediate future.

“Every standards-setting organization has its own interests. It’s a big world and so you have competing standards-setting organizations,” he said.

Drawing on his own experiences as director of the U.N. Global Compact, which promotes the U.N. SDG framework, in trying to “create at least the appearance of supporting each other,” Kell said that an initiative like the Better Alignment Project “works to some extent,” but he noted that many of these frameworks can seem like apples and oranges. The SASB, for example, was originally designed to be relevant specifically to American investors, which could prove problematic when trying to align its standards with global partners, according to Kell.

However, Kell  did not find this necessarily a cause for worry. He conceded that wading through all the frameworks is inconvenient, but ultimately, he sees this as the nature of the beast: many paths to one goal.

“Now I take a more holistic view,” he said. “It’s not going to matter so much because they’re all moving in the same direction, all aiming at the same goal, and many, many ways of [getting] there. So I wouldn’t oversell the lack of harmony as a major, major problem. Yes, it’s a nuisance that could be better in an ideal world, but we live in a reality of competing organizations and economies and regions, so we have to allow for some diversity—even divergence—in some cases.”

Sustainability’s own big four

Michael Kraten, a member of the Sustainability Investment Leadership Council—created to foster insight on how accountants and attorneys can incorporate sustainability practices that align economic opportunity with sustainable policies—was similarly sanguine, though for a different reason than Kell. While there are many different sustainability frameworks, the way the market is starting to shape up, it has begun developing its own big four: the GRI, the SASB, the U.N. SDG and the IIRC. In contrast with Kell, Kraten believes that these four can work very well together, observing that they actually produce complementary standards.

A group of practitioners who are putting together an integrated report would likely start with the GRI framework, Kraten said, because it presents universal standards that apply to the functions of any organization. Then, they could move on to the SASB standards and select metrics customized for their industry. Next, he said, they would realize that the GRI and SASB standards define metrics from the organization’s point of view but not from society’s, and so they would then go to select metrics from the U.N. SDG. Finally, they would be faced with the question of how to integrate all these standards and metrics into a single report. This would lead them to the IIRC’s framework, which can define that structure.

“These may be four different organizations, but they produce complementary information. Although a single organization may be easier to follow, as long as an individual understands the role of each entity, I don’t think [the practitioners would] have a problem,” Kraten said.

Parham said that the project, though new, has already made a similar discovery, noting that there is already a high degree of alignment among frameworks, which he called a “powerful finding.” He added that members of the project have also found a high degree of alignment among the metrics used by various frameworks. The underlying data being asked for by each is not what’s substantially misaligned, he said, but, rather, “each framework in certain cases may have some additional reporting requirements on top of the core data that are intended to serve the needs of various stakeholder audiences.”

Still, Parham said the goal was not full compatibility. 

“So, in some instances, I do not think the frameworks will ever be fully compatible, nor should they be,” he said, “as that would mean that there are fewer tools available for companies to leverage in achieving clear, consistent and effective communication to their key constituencies who are interested in this information.”

The second part of this series, to be published in the September/October issue, will focus on the unusual incentives built into some sustainability frameworks, which can lead to unexpected results.


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