Are GRI standards under threat of being sidelined in a rush to adopt more corporate-friendly ESG frameworks?
originally published by author on Linkedin on 13 Jan,2023
Most experts agree there is still much work to be done in refining and strengthening ESG reporting. Recent attempts to streamline frameworks under the auspices of the International Sustainability Standards Board (ISSB) have been focused on reporting the financial impact of various ESG aspects on an organisation, known as financial materiality. This potentially sidesteps the concept of impact materiality - assessing the wider view of an organisation’s impact on the environment, society and planet alongside their impact on the organisation itself.
These are two distinct but complementary concepts. Impact materiality, granted, is harder to calculate in monetary or financial terms and is perhaps seen as a more long-term view of sustainability and its impact, financial or otherwise. As the International Monetary Fund (IMF) put it in its letter to the ISSB on July 22 (albeit referring to it as dynamic materiality): “the concept of materiality is a continuum along which different issues, impacts and information may fall and evolve… the concept of “dynamic materiality” stems for instance from the observation that issues material to environmental and social objectives may turn out to have financial consequences over time.” But in its essence, it recognises the fact that, in practice, creating enterprise value only happens if the enterprise is creating value for stakeholders, society and the environment.
It is this concept of impact materiality that distinguishes the ISSB proposed standards from the Global Reporting Initiative (GRI) Standards.
The ISSB was established in November 2021 at the COP26 in response to strong demand for high-quality, globally consistent sustainability disclosures that enable investors to assess sustainability-related risks and opportunities when making investment decisions and assessing enterprise value.
The global baseline builds upon some of the existing investor-focused sustainability disclosure standards, including those of the FSB Task Force on Climate-related Financial Disclosures (TCFD), the Climate Disclosure Standards Board (CDSB), SASB Standards (Sustainability Accounting Standards Board), Integrated Reporting and the World Economic Forum’s metrics.
GRI, on the other hand, is an international independent standards organisation that has produced a modular style framework to help businesses, governments and other organisations communicate their impacts and those of their value chain on sustainability issues in a way, that enables a multitude of stakeholders including investors and the public to understand these impacts.
The IFRS Foundation has entered into a cooperation agreement with GRI to reduce the reporting burden for jurisdictions and companies when combining the ISSB’s global baseline and the GRI’s multi-stakeholder sustainability reporting requirements. However, as currently published, the two climate standard drafts proposed by IFRS/ISSB focus on shareholders, value creation and financial materiality.
Legislation in various jurisdictions, for example the EU, has incorporated some parts of GRI. However, not all of it. Therefore, the fear is that the focus will be solely on those aspects that impact a company’s profitability.
What is happening in the standards arena, I believe, is a reflection of what is currently happening in the market. A reflection of the gap between how investors and financial institutions apply ESG (financial materiality) and how the public expects it to be applied (both financial and impact materiality, i.e double materiality).
Examples of double materiality
Earlier this year, shareholders of Sainsbury’s tabled an AGM decision to require that Sainsbury’s be accredited by the Living Wage Foundation, a charity which calculates a “Real Living Wage” rate based on cost-of-living estimates. The proposed wages would apply to all staff including sub-contractors. Schroders, one of Sainsbury’s top five shareholders, announced in July 2022 that it would not support this decision citing:
“We [Schroders] strongly believe, in this environment particularly, this could inhibit Sainsbury’s ability to remain competitive; for example, making it harder to keep prices of essentials low. This could ultimately be worse for its employees, customers and investors.”
Another example is when MSCI gave McDonald’s a ratings upgrade in 2019, citing the company’s environmental practices. MSCI did this after dropping carbon emissions from any consideration in the calculation of McDonald’s rating. Why? Because MSCI determined that climate change neither poses a risk nor offers “opportunities” to the company’s bottom line.
We all agree that companies must remain financially sound. Yet, these results are not exactly what customers expect. When consumers talk about sustainability, they are generally talking about aspects that not only focus on profits, but on people and the planet. The environment in the McDonald’s example, and the employees in the case of Sainsbury’s.
There may be practical reasons for including this double materiality definition. For example, double materiality is already required by EU regulators under the Corporate Sustainability Reporting Directive. In addition to the fact that GRI is adopted in many jurisdictions already. Interoperability between ISSB and jurisdictional requirements is a key factor as to why the world is demanding standardisation.
Final Thoughts
But practicality aside, the issue of double materiality goes to the heart of the sustainability movement. If we do not adopt double materiality as the lines of GRI, the question becomes: are we looking to develop a sustainable economy, or simply assess the financial impact of risks arising from climate and other specific sustainability concerns, on a company’s performance and its value. In other words, we would be going back in time to reinforce the same issue that got us into the problem we are in now: solely focusing on corporate profits and shareholder value creation. I believe the world has already moved well beyond that.
Luma Saqqaf
Ajyal Sustainability Consulting
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