The paper articulates common reporting metrics for sustainable value creation for companies reporting on ESG performance.
On September 22, 2020, the International Business Council (IBC) of the World Economic Forum (WEF), in collaboration with Deloitte, EY, KPMG, and PwC, published a white paper, Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation (the Report), with the purpose of establishing consistency and comparability for companies reporting on their environmental, social, and governance (ESG) performance. The Report is the culmination of a process that began with the WEF’s issuance of a consultation draft, Toward Common Metrics and Consistent Reporting of Sustainable Value Creation, in January 2020.
The Report reflects a collaborative effort by the Big Four accounting firms to address the need for harmonized reporting standards, to counter the “alphabet soup” of ESG metrics that currently exists. This theme of standards convergence is front and center in the ESG reporting world. Just this month, several of the leading ESG reporting organizations — including the CDP, the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), and the Sustainability Accounting Standards Board (SASB) — pledged to work together on harmonizing sustainability standards.
A Four-Pillar Approach
Using the existing ESG standards, the Report establishes 21 core and 34 expanded metrics and disclosures that map to the UN Sustainable Development Goals. The Report organizes these metrics in four pillars, including:
- Principles of governance: governing purpose; governance body composition; material issues to stakeholders; anti-corruption; ethics and reporting mechanisms; risk and opportunity oversight
- Planet: Greenhouse gas (GHG) emissions from Scopes 1, 2, and 3; Task Force on Climate-related Financial Disclosures (TCFD) implementation; land use and ecological sensitivity; water consumption; and withdrawal
- People: diversity and inclusion; pay equality; wage levels; executive compensation; supplier and employee health and well-being; employee training
- Prosperity: employment and wealth generation; investment in innovation; tax strategy
The Report goes further to encourage companies reporting on their ESG performance to consider the impact of their operations on the planet and in society “across the full value chain, in more tangible, sophisticated ways, including the monetary value of impacts.” Using the four-pillar approach, this includes:
- Principles of governance: how purpose is embedded across the company; progress against strategic milestones; remuneration; alignment of strategy and policies to lobbying; monetary impacts of unethical behavior; consideration of economic, environmental, and social issues in capital allocation
- Planet: aligning GHG targets to the Paris Agreement; impact of GHG emissions; land use of operations and full supply chain; impact of land use and conversion on ecosystems; impact of water consumption and withdrawal; air pollution and its impact; water pollution and its impact; single-use plastics in value chain; impact of solid waste disposal; resource circularity
- People: pay gap percentages; discrimination and harassment incidents and the corresponding monetary losses; percentage of workforce and suppliers under collective bargaining agreements; human rights reviews, grievance impact, and modern slavery; living wage percentage; monetary impact of work-related incidents; employee well-being statistics; number of unfilled skilled positions; monetary impacts of employee training
- Prosperity: infrastructure investments and services and the indirect economic impacts; society value generated percentage; vitality index; total social investments; additional tax remitted; total tax paid by country for significant locations
“Disclose or Explain”
Though the metrics and disclosures are meant to be industry-agnostic, the Report recognizes that certain metrics might not be feasible or material from one company to the next, with “materiality” defined by the Report as “information that is important, relevant and/or critical to long-term value creation.” Companies will be expected to “disclose or explain” any metrics they deem immaterial, including their reasoning for the omission of a specific metric or disclosure. The Report recognizes that this view of materiality is not intended to reference legal definitions, such as those of US securities laws, and that certain metrics or disclosures might present confidentiality concerns, legal prohibitions, and other issues regarding data availability and geographic idiosyncrasies.
Toward Sustainable Value Creation
The business landscape regarding economic and ESG issues continues to be transformed in 2020, with intensifying natural disasters, social unrest sparked by working conditions and racial injustice, and COVID-19 highlighting the role of corporations in these economic, social, and environmental systems. In light of this landscape, the Report says, “companies need to build their resilience and enhance their license to operate, through greater commitment to long-term, sustainable value creation.”
The Report is part of a growing number of initiatives that have accelerated progress towards a comprehensive ESG corporate reporting system in the past year. In particular, regulators and policymakers have demonstrated a growing desire to address the connection between financial risks and ESG-related concerns. Recent examples of initiatives in this area include:
- November 2019: The Financial Reporting Council published the UK Stewardship Code 2020, setting out standards for UK institutional investors to adopt when engaging with their investments.
- January 2020: The European Commission announced a proposal to develop non-financial reporting standards that take into account internationally recognized standards.
- April 2020: The International Organisation of Securities Commissions acknowledged in a report that only by understanding financial and sustainability information together can investors and governments gain the necessary insight into company performance.
- July 2020: The EU’s Regulation on the Establishment of Framework to Facilitate Sustainable Investment (the Taxonomy Regulation) entered into force.
- September 2020: CDP, CDSB, GRI, IIRC, and SASB pledged to work together by providing joint market guidance on sustainability standards while also building a shared vision of how such standards could complement generally accepted financial principles.
The Report aims to create convergence on a market-based, global, standard set of ESG reporting metrics. With the Report, the WEF aims to narrow the reporting landscape rather than simply add to the crowded mix of standards and frameworks. The Report invites all IBC members to declare their intention to report on the recommended metrics and disclosures.
Latham & Watkins will continue to monitor developments in this area.
This post was written with the assistance of Anissa Vasquez in the Washington, D.C., office of Latham & Watkins