Saving the planet one accounting metric at a timeby
Measurements of how “good” a business is, beyond simply returning capital to shareholders, are part of efforts to standardise environmental, societal and governance reporting, improve society and save the planet. But the metrics, drawn up by the Big Four, don’t often tell the full story.
From the masterminds behind Davos, a new meeting of world and business leaders convened virtually this week to address efforts in sustainable development - chiefly, how can the world exit the pandemic stronger than it entered? This challenge is unequalled in the modern era, speakers warned, due to the unrelenting pace at which new crises are appearing.
Efforts to contain the coronavirus spread are flanked by movements to tackle wildfires, floods, droughts, heatwaves, wildlife extinctions, food shortages, energy shortages, gender and racial inequalities, and corporate and government corruptions.
Of the seven key themes of the Sustainable Development Impact Summit, with bracing titles such as ‘How to save the planet’, all discussion points lead back to capitalism and the costs of furthering wealth.
“We owe most of the social progress of the past to entrepreneurship and to the capacity to create wealth by taking risks and pursuing innovative new business models,” World Economic Forum (WEF) founder and executive chairman Klaus Schwab wrote during the height of the pandemic. “But we must rethink what we mean by ‘capital’ in its many iterations, whether financial, environmental, social, or human.”
Not all heroes wear capes
That businesses must balance their aims to repay shareholders with the broader needs of their employees, society and the planet is the central tenet behind ‘stakeholder capitalism’. With an exhaustive list of disasters striking economies and populations, as with many things in business, it’s been left to the accountants to sort out.
A harmonisation of reporting standards is underway, and not a moment too soon according to the Davis set. The problem is the wide range of reporting frameworks currently in play. More than 100 ESG reporting guidelines exist, often conflicting with each other, and making it impossible for outsiders to understand if credible progress is being made.
Ninety percent of corporates said that a set of universal ESG metrics and disclosures would help financial markets, and that consolidation around a single, universal set of standards is necessary.
The Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC) recently merged to create a single global standard. Elsewhere, the International Financial Reporting Standards (IFRS) Foundation is gearing to launch an international Sustainability Standards Board at the UN’s COP26 climate summit. And, on the back of the European Union’s Corporate Sustainability Reporting Directive (CSRD), the US Securities and Exchange Commission is presently outlining its approach to the ESG reporting.
Twelve months ago, hundreds of businesses also committed to common environmental, social and corporate governance (ESG) reporting standards. This shared set of metrics and disclosures of non-financial factors for investors and stakeholders was cooked up by the Big Four accounting firms on behalf of the WEF, and published in January.
Given the snappy title of Stakeholder Capitalism Metrics, the standard set of universal and material ESG metrics concerns disclosures in the mainstream annual reports of companies, and aims to ensure global consistency in efforts to meet UN sustainability goals.
Big Four stakeholder capitalism
Last week, EY issued a paper to prove how it was holding itself accountable under the buzzword of stakeholder capitalism. In its report entitled EY Value Realized, previously the EY Global Review, it discloses responses to issues such as ethical behaviour and anti-corruption, total tax paid in relation to society and community, the quality of its governing body, and risk oversight.
There are no mentions of the numerous external investigations the company is undergoing in response to the Wirecard debacle amongst other regulatory interventions.
The firm said it has achieved a 60% reduction in carbon emissions, ensured 36% of new EY partner promotions were women, and delivered 59 hours of training on average per EY staff member. It has also committed investments topping £7bn over the next three years to improve audit quality, strategy, technology, and people.
“As we make long-term commitments – achieving net zero carbon emissions, increasing diversity, equity and inclusiveness in the workforce, and contributing to prosperity in the communities we operate in – measuring improvement and action plan results to achieve these commitments is critical,” said the firm’s global chairman and CEO Carmine Di Sibio. “Only by measuring can we benchmark progress, improve decision-making and accountability, and increase trust.”
PwC has not published any of its own metrics, and has little on its website regarding stakeholder capitalism metrics other than advice to clients as to framing increasingly onerous ESG reporting requirements.
“Given both the cost of getting environmental, social and governance (ESG) reporting wrong and the benefits of getting it right, many financial institutions will likely need to invest more in how they communicate their approach to ESG to their stakeholders,” PwC said. “In the past, the winners may not have been the ones who were really the leaders at ESG but rather those who could tell a more convincing story to the market. Going forward, the winners will be those who have a credible ESG story and a credible approach to ESG reporting.”
Earlier in the year, KPMG published a colourful guide on how it would apply the 21 core metrics and 34 expanded metrics of stakeholder capitalism rankings to itself, with the actual detail in a separate index.
Deloitte has also published a wealth of materials on the impact of stakeholder capitalism metrics on boards but a rather lighter take on its own application of the standards - six pages as opposed to the 45 pages EY put out. Deloitte is expected to issue further findings nearer to the end of the next fiscal year.
Green for go, or just greenwashing?
Of the challenger firms, only BDO has publicly signalled its intention to tackle the complexities of ESG reporting and push beyond obligatory disclosures. It put ESG at the centre of its annual shareholder meeting, highlighting more innovative opportunities and enhanced reputational benefits of doing so.
“Sustainability is a priority not only due to genuine concerns about the planet, but also because of its positive impact on returns, as sustainable investments are seen as having greater long-term potential,” the firm said. “Choosing to not prioritize sustainability issues poses a significant risk for board members.”
It also remains to be seen how smaller practices take to the standards. While the initial announcements promised a simple and flexible approach suitable for all companies from SMEs to the big players, there is little information for small businesses who have very different carbon footprints to large corporates, and in many cases do not have shareholders to satisfy.
There is also scepticism of so-called “greenwashing”, or the practice of conveying a misleading impression of environmental credentials in order to improve the reputation of a business.
“Unlike financial performance, social and environmental outcomes cannot be readily monetised or aggregated into simple indicators,” said Addisu Lashitew, a Fellow in the Global Economy and Development program at the Brookings Institution. “The absence of standard metrics for reporting performance creates a scope for companies to cherry-pick what they report to greenwash their images,” Lashitew said.
There is also a risk that managers would focus their energies on multiple, ill-defined or conflicting goals and targets, he added.
“Stakeholder capitalism will require comprehensive reforms on multiple fronts to deliver on its promises,” said Lashitew.