Bridging the ESG reporting gap to meet the Paris climate agreement

Accounting

The current state of ESG reporting reminds me of the 1963 all-star comedy It’s a Mad, Mad, Mad, Mad World about the mad pursuit of a fortune in stolen cash buried in a park in California. Several strangers stop at the scene of a car accident to help what turns out to be a bank robber. Just before his death he tells them about the cash buried under a big “W.” After they initially plan to collaborate, greed gets the better of them. Each goes off in hot pursuit of the money until two of them who make it to the park first begin chasing each other in circles around two enormous palm trees until they collide into each other. As they lie on the ground, they look up and see what they had been looking for right in front of their eyes: two palm trees crossed as a big “W” under which the money is buried.

This is how I see the all-too-many competing sets of ESG standards and competing standard-setters, accountants and even think tanks all proposing their own standards, even though the U.N. has created a framework that was already endorsed by the ISAR 36th session on International Standards of Accounting and Reporting, with the participation of about 400 delegates representing about 100 members states (countries) of UNCTAD, the United Nations Conference on Trade and Development.

Right in front of everyone’s eyes are the UNCTAD-ISAR Global Core Indicators (GCIs), which is likely the only sustainability framework that is internationally recognized and endorsed by accounting professionals, governments, regulators, standard-setting agencies and investors from around the world after a multiyear collaborative effort. The World Business Council for Sustainable Development (WBCSD) also endorses the GCIs as a baseline approach to facilitate harmonization and comparability on ESG and SDG reporting.

Oddly, even the IFRS Foundation, which was cooperative with UNCTAD in developing the GCIs, failed to recognize the UNCTAD-ISAR Global Core Indicators in its assessment analysis of private sector sustainability reporting leading up to its call for comments on its Consultation Paper on Sustainability Reporting, something I pointed out in my comment letter last December.

The Global Core Indicators cover four main disclosure elements: 1) economic, 2) environmental, 3) social, and 4) institutional and governance. They fulfill all of the quantitative requirements — consistent, comparable, material and universal. The GCIs create synergies and complementarities across other frameworks such as the Task Force on Climate-related Disclosures (TCFD) and can be the implementation tools for TCFD-aligned reporting, which the U.K., the first G20 country, is proposing to make mandatory across the economy by 2022. The GCIs also facilitate convergence of financial and nonfinancial reporting, making them suitable for consolidated, integrated reporting and legal entity reporting — the “Holy Grail” of ESG reporting — which none of the other measurement systems does.

For companies wanting to contribute to the United Nations’ Sustainable Development Goals, the GCIs show which SDGs are relevant to companies since they were actually designed for countries not companies. Therefore, not all SDGs are relevant to a company, since a company may not have any control over a particular SDG, or SDG Target or Indicator. In fact, of the 17 SDGs, only 10 directly apply to companies. Of the 169 Targets, only six directly apply to companies. And of the 231 “unique” indicators, only 21 directly apply to companies. The GCIs are aligned with the SDG indicators and provide a roadmap for companies. The GCIs show which of their 33 metrics are relevant to a particular SDG over which a company has control, and for which it already gathers data as part of its regular reporting cycle, or has access to relevant sources of information. Moreover, the GCIs provide contextualization and show how each of the 33 GCIs is relevant to a particular SDG Indicator and help provide a business case for companies wanting to contribute to the SDGs. That means reporting on only 21 out of the 231 “unique” SDG Indicator.

Finally, the GCIs are contextual. Most frameworks’ sustainability disclosure topics and accounting metrics are devoid of any context. To have any real meaning, the question concerning any reported metric must be, “relative to what?” The GCIs contextualize with metrics such as GHG emissions (Scope 1 or Scope 2) per unit of a company’s net value added. This provides for company micro-level sustainability indicators to link to macro national statistics, as economic net value added of each company within a country maps into a country’s GDP. This provides one-way progress on transitioning to a low-carbon economy; delivering on the SDGs can be measured not only at the company level but also at a country macro-level.

Returning to our cautionary tale, we cannot afford to continue to go in circles and dither while investors are searching for a consistent framework on which they can base their investment decisions. We need to mobilize the institutional capital where investments are most needed, at the scale required to close the $6.9 trillion annual funding gap needed to meet the Paris Agreement and the annual $2.5 trillion SDG financing gap, both by 2030. Investors need and deserve high-quality, consistent, comparable and reliable sustainability information. And the framework for companies to provide such information is right before our collective eyes in the Global Core Indicators.

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