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Has defining sustainable investments just got easier?

A common standard for reporting on sustainable investments is now a step closer, thanks to the World Economic Forum. But with so many factors to consider, just how effective is it likely to be?

Author: Adam Branson

25 January 2021

Illustration: Vanessa Branchi

What a difference a decade makes. In the wake of the 2008 global financial crisis, the tentative steps industry and governments had taken towards adopting more environmentally sustainable practices and policies were abandoned as industry and political leaders attempted to jettison anything seen as a cost to business.

As a result, when the COVID-19 pandemic emerged early last year, the fear among environmentalists was that history would repeat itself; that countries and businesses would forget about Greta Thunberg, all those declarations of climate emergencies and the commitments made at the COP21 Sustainable Innovation Forum in Paris in 2015. The encouraging thing is that, to a great extent, none of that has happened.

Rather, it would appear that investors in particular have doubled down on their commitments to environmental, social and governance (ESG) issues, echoing BlackRock chief executive officer Larry Fink’s 2018 warning to the companies in which his firm was invested that if they didn’t take such matters seriously, BlackRock would disinvest. Fink’s position no longer looks so lonely.

There are still sizeable issues to resolve, though. Perhaps most importantly, for a long time, investors had no single way of comparing ESG metrics across different industries and companies due to the fact that there are multiple methodologies available that did the same thing but in different ways. Some methodologies are more popular in some geographies, but there is no confirmed position in any.  

“The ESG or sustainability reporting landscape has been growing organically for a while,” says Tom Roundell Greene, director, global sustainability, at JLL. “There’s a mixture of voluntary frameworks, increasing levels of mandatory reporting, all these various asks of businesses from a range of different stakeholder groups. It’s a very disjointed, fragmented landscape, often asking for the same information in umpteen different ways.”  

Katie House, analyst, verification and impact, at Affirmative Investment Management, agrees. “I can see from a corporate perspective, if you’re starting out or if you’re trying to enhance your sustainability reporting, it is a little bit complex to know which one to go for,” she says. “There are a host of different ones that you could pick and there’s not really any consolidated message saying this is the best one that you should use.”

“It’s a very disjointed, fragmented landscape, often asking for the same information in umpteen different ways” Tom Roundell Greene, director, global sustainability, JLL

However, thanks to a substantial project initiated by the World Economic Forum (WEF), that issue could be resolved in short order. Working with various partners, WEF has come up with a series of metrics that it says can be used by all companies in all industries, creating conformity out of confusion in much the same way that the IFRS Standards do for accounting. So, how likely is it that the WEF metrics will be taken up? And what barriers might there be to adoption?

The WEF metrics were launched on 22 September last year at the Sustainable Development Impact Summit in a report entitled Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation. Speaking at the launch, WEF founder and executive chairman Klaus Schwab said: “With these metrics, the business world will finally be able to walk the talk on their commitment to ESG performance and the stakeholder capitalism principle.”

The report, which contains 21 core and 34 expanded metrics across the four key pillars of governance, planet, people and prosperity, was the culmination of a year of work by the big four accounting firms – Deloitte, EY, KPMG and PwC – under the leadership of the WEF. The idea was to identify common cause in the existing ESG frameworks and align them with the United Nations’ sustainable development goals.

“We’re not trying to replace anything out there – we’re just trying to come up with a common set of metrics that companies can sign up to,” says Carmine Di Sibio, EY global chairman and CEO, adding that the metrics will allow stakeholders to understand a company’s long-term value rather than the short-term view many current financial metrics show.

According to Bill Thomas, global chairman and CEO of KPMG International, companies have a more direct self-interest in adopting the metrics. “One of the biggest reasons to do it is… [for] attracting and retaining the very best people today,” he says. “They want to work for an organisation that has a purpose beyond simply profits; they know that business has to play a role to build a better, more sustainable society.”

The hope is that if sufficient companies embrace the standard set out in the report, they will ultimately be adopted by regulators in a similar way to global accounting standards.

“We’re trying to influence the regulators, the standard-setters, the rating agencies around the world and say, ‘these are the ones we truly believe as a business community are the right measures to start with’,” says Bob Moritz, global chairman at PwC. “We’re not looking for perfection, we’re looking for progress.”

However, it is already pretty clear that companies that adopt the WEF’s metrics will still need to report additional details. The methodology is necessarily generic, given that it needs to apply to all sectors of the economy everywhere, so firms will need to provide additional information through existing platforms if they are to satisfy investors’ thirst for knowledge. “I think the idea is that this would be the sort of baseline minimum,” says Roundell Greene, who represented JLL on the project’s practitioner group.

“I think there’s always going to be a need for reporting through other avenues. The [WEF] metrics are not always going to satisfy all stakeholders all the time. For example, with the metrics for the issues that we report on in our sustainability programme, they probably overlap with [them] largely, but also go beyond what is listed. So, I think there will still be a need for organisations to report on their own material issues, which may well go beyond the requirements from WEF.”

Certainly, many investors will be looking for more industry-relevant information. “I think, at least from our perspective, we couldn’t just take the metrics that WEF is recommending and say ‘right, that is all the sustainability reporting we’d require’,” says House. “They’ve consolidated and looked at what lots of different places are asking for and then come up with core recommendations. But there is going to be some stuff that is actually very sector specific.”

“We’re not trying to replace anything out there – we’re just trying to come up with a common set of metrics that companies can sign up to” Carmine Di Sibio, global chairman and CEO, EY

And yet, Roundell Greene still believes that having the WEF methodology as a baseline will make non-financial reporting easier and more efficient for companies. “We basically spend 10 months of the year preparing for reports, so that’s data collection, verification, site audits and then the actual process of writing reports or submitting responses to these various indices,” he says.

“We’re spending 10 out of 12 months a year in some way being involved in that work and then the remaining two months involved in analysis. From my point of view, [it’s about] freeing up my team to actually deliver change, rather than simply talking about change.”

Of course, most companies do not have JLL’s scale and some commentators wonder how realistic it is to expect smaller firms to adopt the WEF standard. “It would be nice if pretty much all companies could do this sort of thing, but there’s a lot of complexity that’s not going to make it straightforward for anybody to approach without employing specialists to do it for them,” says Timothy Lee, lecturer in the School of Engineering and the Built Environment at Birmingham City University. “I think it’s a good idea, but I think it’s only practical for large firms, which then makes it less useful.”

Another issue is that in itself the methodology may not be enough to drive sufficient change, particularly on the environmental front. Susanne Eickermann-Riepe FRICS, chair of the advisory board at RICS Germany, is supportive of the WEF initiative but says that it is down to governments to set targets to deliver improvements at the pace required in the built environment.

“The targets have to set by the government,” she says. “We are not there at the moment. Everybody is discussing green buildings and social responsibility and looking for reporting, but on the government side, they have no clue. You cannot do sanctions if you have no target.”

So just how likely is it that the methodology will be adopted at sufficient scale to really make a difference in terms of consistency and transparency at a global scale? For his part, Roundell Greene is hopeful that firms will embrace the initiative, although he adds that making it compulsory would be the better outcome.

“The metrics are there; you can work to comply with them,” he says. “The hope is that they will be adopted globally. [But] in my view, they should be mandatory for all businesses. My aim for it would be just to have a globalised mandatory approach to releasing non-financial information routinely as part of company filings.”

Of course, making the standard compulsory at a global scale isn’t going to happen any time soon, no matter that the world is increasingly taking climate change ever more seriously. For now, the pressure is likely to come from the investment community – which may turn out to be almost as effective as government edict in driving adoption.

“Everybody is discussing green buildings and social responsibility and looking for reporting, but on the government side, they have no clue. You cannot do sanctions if you have no target.” Susanne Eickermann-Riepe FRICS, chair of the advisory board, RICS Germany

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