Asset Owners And Organizational Reporting Frameworks: Time To Consolidate, Simplify, And Innovate
“The Global Reporting Initiative (GRI) enables all organizations to report their economic, environmental, social, and governance performance through its Sustainability Reporting Guidelines.”
Global Reporting Initiative
“The Sustainability Accounting Standards Board (SASB) develops and disseminates sustainability accounting standards that help public corporations disclose material, decision-useful information to investors.”
Sustainability Accounting Standards Board
“The Taskforce on Climate-Related Financial Disclosures (TCFD) has developed a set of voluntary, consistent, climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.”
Taskforce on Climate-Related Financial Disclosures
“The Non-Financial Reporting Directive (NFRD) requires disclosure to the extent necessary of the development, performance, position, and impact of an organization’s activities. This means organizations should not only disclose how sustainability issues may affect them, but also how they affect society and the environment.”
“The goal of the International Integrated Reporting Council (IIRC) is to bring greater cohesion and efficiency to the reporting processes of organizations, break down internal silos, and reduce duplication. Its focus on value-creation over time contributes to a more financially stable global economy.”
International Integrated Reporting Council
Too Much of a Good Thing?
The McKinsey consulting organization recently surveyed over 100 senior executives from the corporate, asset owner, and asset management sectors on their assessment of the state of sustainability reporting practices around the world.i The survey indicated that investors have begun to question prevailing sustainability reporting practices. The most-often mentioned investor complaints were data inconsistency/non-comparability and lack of alignment in standards. Corporate executives were equally unhappy, citing excessive efforts and expense to respond to an ongoing stream of specialized requests for essentially the same information (e.g., GHG emissions data tabulated in different ways to conform to differing standards).
Survey participants agreed that the solution to overcoming these difficulties is consolidation by combining/rationalizing currently competing frameworks/standards.ii The McKinsey authors noted a reluctance by many of the survey participants to directly involve themselves in these consolidation efforts. Ever the attentive consultants, the authors suggested that direct involvement in the needed reporting standards/metrics consolidation efforts would give participating corporations, asset owners, and asset managers a competitive reporting edge in the years and decades ahead. So get involved!
Two Related ‘Lightbulb’ Revelations
While the need for framework/metrics consolidation in the sustainability reporting space is clear, there are two other fundamental issues that must be addressed at the same time. One is to recognize that organizational ‘reporting’ has two distinct dimensions that should mutually support each other: 1. A narrative describing the past, present, and future of the organization’s value-creating journey. Ideally, this narrative is standardized at least to some degree and independently assured, and 2. A cluster of financial and non-financial information/data/metrics about the organization that are highly standardized and independently audited.
Coming to this ‘two dimensions’ realization has been a ‘lightbulb’ moment for me personally. It clearly positions the 10-year journey of the International Integrated Reporting Council (IIRC) with its <IR> Framework to develop the ‘narrative’ dimension of reporting. It also clearly positions the journeys that GRI, SASB, TCFD, FASB, IFRSB, and others have been on to develop the ‘standards/metrics’ dimension of reporting. And to say it again, these two dimensions do not compete with each other. Quite to the contrary, they complement each other. They are two sides of the same reporting coin.
At the same time, there has also been a ‘lightbulb’ moment for many of the people focusing on the sustainability reporting challenge. It is their recognition of the special role asset owners can play in the journey towards a single, focused, effective organizational reporting framework. Asset owners are not just investors needing more useful information from investee corporations. They are also ‘value-creators’ for millions of retirees, workers, and their employers as they deliver investment management and benefit advice and administration services to these constituents. Thus in addition to their information needs as investors, asset owner organizations have the same constituent reporting obligations as investee corporations. This creates a natural opportunity for asset owners to lead by example.
How CBUS Super Leads by Example
Our April 2019 Letter showcased Australia’s CBUS Super organization as an asset owner leading by example. The Letter took readers through the narrative section of CBUS Super’s 2018 Annual Report, which used the <IR> Framework as its structure (i.e., from Organization Overview, to Governance, to Business Model, to Performance, to Risks/Opportunities, concluding with Strategy/Resources). However, that Annual Report also contained a cluster of ‘standards/metrics’ based on the recommendations or requirements of the cited standard-setting organizations.
Examples from the CBUS Super 2018 Annual Report:
- We use the UN’s 17 Social Development Goals (SDGs) as criteria for creating a Global Quality Equities strategy, as well as to inform Cbus Super’s voting and engagement intentions. An investment example is Bright Energy (a wind and solar renewable energy company). Two engagement examples are Commonwealth Bank of Australia (money laundering and cultural issues) and Rio Tinto (lack of climate-related disclosures). Cbus Super believes the ‘S’ in ESG is best tackled through collective action organizations such as Responsible Investment Association of Australia and the global Workforce Disclosure Initiative.
- The 10yr net return on the Cbus Super default investment option was 7.2% vs. 6.4% for the median Industry Fund and 5.3% for the median Retail Fund. Longer and shorter evaluation periods produced similar results. These results were achieved with a below-median equity portfolio carbon footprint (280 vs. 290) and a property portfolio sustainability GRESB score of 97/100, which is 3rd out of 874 global rankings. The Report also provides more qualitative performance assessments on SDG goals related to gender equality, renewable energy, sustainable infrastructure, and participating in collective national and international ESG/SDG-related initiatives.
All of this is a snapshot in time. Where will these kinds of disclosures by asset owners go in the coming years? A quick look at the new CBUS Super 2019 <IR> Report provides an indication: stricter portfolio carbon emissions standards, greater focus on supporting the UN SDGs and the TCFD recommendations, investing in climate risk modelling technology, measuring fatalities in RE and INFR investments, attaining A+ ratings in Principles for Responsible Investment (PRI) assessmentsiii, and further levering the impact of collaborations such as Climate Action 100, Tobacco Free Portfolios, and the Workforce Disclosure Initiative.
Time for Asset Owners to Adopt
The striking thing about CBUS Super’s adoption of <IR> is that it is a gift that keeps on giving. This came out clearly in a recent IIRC webinar on CBUS Super’s <IR> adoption story. Here is a summary of how CEO David Atkin made the case for the adoption of <IR>iv:
- We are now in the 6th year of our <IR> journey. The process is accretive in the sense that we continue to learn and become more effective at what we do each year. The word ‘coherence’ comes to mind. Initial <IR> implementation responsibility rested with our Communications Group, but over time, it moved to the Office of the CEO to make sure all the strategic dots in the organization are being connected.
- Board involvement is critical. <IR> helps the Board identify material stakeholder wants and needs, connects those wants and needs to our business model, to how we measure performance and compensate people, and to how we look ahead in setting strategy.
- <IR> implementation has raised stakeholder trust in CBUS Super. This stakeholder trust has been bolstered by subjecting our <IR> reporting to an independent external assurance process confirming that what we report is based on facts and not fiction. This assurance also motivates us to dig deep and not to sugarcoat things requiring improvement.
- <IR> has helped us identify our data needs, and the bundle of standards and metrics we should be measuring and reporting on.
- <IR> is becoming increasingly valuable to us as investors. In many corporations now, ‘value’ can no longer be measured by adding up their physical and financial capital. This means non-financial disclosures have become increasingly important. The <IR> Framework helps define what those corporate disclosures should be and helps organize them into an investor-friendly narrative. As a result, we ask companies to use the <IR> Framework. We would have no credibility doing that if we did not use the <IR> Framework ourselves.
- Thus the broad adoption of <IR> by asset owners around the world would not only make them more effective organizations themselves, but would also foster sustainable value-creation in the companies they invest in.
David Atkin’s final point is worth repeating. At a time when innovation is urgently needed in the global asset owner sector, adopting <IR> could be the highest return investment opportunity available today. Can you afford to NOT make that investment? What is stopping you?v
- Bernow, Godsal, Klempner, and Merten, “More than Values: The Value-Based Sustainability Reporting Investors Want”, McKinsey&Company. For three other recent good commentaries on reporting frameworks/ standards consolidation, see “The Rise of Standardized ESG Disclosure Frameworks in the United States”, “Building a Global ESG Disclosure Framework: A Path Forward”, and “Five myths in the debate about the future of sustainability reporting”.
- The quotations on the Letter front page come from five leading organizations in the non-financial reporting standards field: * GRI is an international independent standards organization founded in 2000. Its sustainability reporting framework, developed by the Global Sustainability Standards Board, is widely used around the world. It is a collaborating centre of the UNEP and works in collaboration with the UN Global Compact. GRI’s stance is to look at how a corporation’s activities impact the larger outside world. * SASB was originally launched in 2011 to help companies prepare comparable non-financial corporate filings with the SEC. It published a set of global disclosure standards in 2018 based on materiality at the industry level. SASB’s stance is to look at how the larger world impacts a corporation’s business model, risks, and opportunities. * TCFD was launched by the Financial Stability Board in 2015 to develop a standardized approach to climate-related financial risk disclosures for companies. It published a series of reports in 2017, 2018, and 2019 that recommended increasingly detailed standardized disclosure processes starting with governance, through strategies, risks, metrics, and targets. This work is being furthered by a Climate Disclosures standards Board. * NFRD rules promulgated by the European Commission requires large enterprises to disclose information on the way they operate and manage social and environmental challenges, including on environmental protection, treatment of employees, respect for human rights, anti-corruption, and board diversity. The 2014 version was updated in 2017, and is now under review again. See HERE for a recent update submission by 12 interested parties to improve the NFDR. * IIRC was founded in 2010 by a global coalition of regulators, investors, companies, standards setters, the accounting profession, academia, and NGOs. It promotes communication about value-creation as the next step in the evolution of organizational reporting. The <IR> Framework was launched at the start of its 2014-2018 Breakthrough Phase. In the new Momentum Phase IIRC is levering the support of its partners to create scale and pace to deliver a step change in <IR> adoption. This Letter is intended to contribute to that effort. IIRC itself has launched the Corporate Reporting Dialogue and the Better Alignment Project to accelerate the pace of <IR> adoption. Maybe there should be a separate Asset Owner Reporting Dialogue as well.
- As part of updating its signatory reporting framework, PRI has published a new report titled “Investing with SDG Outcomes.”
- The full 1.5hr IIRC Webinar can be accessed HERE. My 7min video in why asset owners should lead in the adoption of <IR> can be accessed HERE.
- Broad adoption of the <IR> Framework would not be the end of the sustainable investing story. Ralph Thurm and Bill Baue of r3.0 have just distributed a draft of their Sustainable Finance Blueprint for public comment. That Blueprint recognizes that the ecological and social carrying capacities of our planet are finite, and that we must move to a ‘threshold investing’ regime which explicitly recognizes these physical and social limits. A summary of their Blueprint can be found HERE.
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