Next the Impact Foundation?

by Carol A Adams

Main points:

  • You can talk about impact on sustainable development without talking about value BUT you can’t talk about value creation without knowing your impact
  • If we don’t achieve the SDGs there won’t be any “enterprise value creation”
  • Sustainable development issues have “synergies” with people and planet – not financial statements
  • We need an Impact Foundation

The press releases of the IIRC and SASB about their merger to form the Value Reporting Foundation talked about the urgency of addressing sustainable development issues. Easy to agree with. But how will the Value Reporting Foundation achieve this? Neither the IIRC nor SASB address impact on sustainable development. The adoption of the term “enterprise value creation” is narrower than the International <IR> Framework’s value creation for organisations and society. A backward step? Or a case of one step backwards and two steps forwards that are still to come?

The investor perspective?

Investors, we’re told, are demanding simplification of non-financial reporting and consistent, comparable, largely quantified data. Which investors? Well certainly Larry Fink, CEO of BlackRock the world’s largest asset manager. But BlackRock invests in fossil fuels and Members of the European Parliament complained that they won (by putting in a low bid) the contract to advise the EU on ESG requirements to be included in banking regulation. There was concern BlackRock might advocate for softer requirements. The EU Ombudsman has reprimanded the EU Commission for appointing BlackRock given their conflict of interest. Larry Fink also advocated the use of SASB.

So how much credence should we give to what investors say they want? Investors aren’t asking the right questions about sustainable development impacts and implications for value creation. In any case, concerns about shifting capital to achieve the SDGs are growing and an increasing number of investors are seeking to be part of the solution.

I’m not aware of either party to the Value Reporting Foundation having considered the question:

At what point do physical risks of climate change, poverty and inequality become important to investors?

For some they undoubtedly already are. The South African Board Directors I interviewed were certainly concerned about poverty and inequality, its potential to lead to civil unrest, and the implications of that for investors. Poverty reduces revenue potential. Investors should have been interested in whether airlines and cruise companies reported mitigation strategies for pandemic risks. But clearly they weren’t, because only a small minority did pre COVID.

Say we decided to acknowledge some of these impacts on value creation. How would we measure it? If we did measure some, there would be a shift away from thinking about those issues not so easily measured to those that can. This is not speculation. There’s been over 30 years of research looking at the behavioural consequences of what is measured and reported and what is not.

The IFRS Foundation Trustees have spoken of potential synergies between the International Accounting Standards Board (IASB) and a “Sustainability” Standards Board (SSB) under their roof. But sustainable development issues have synergies with people and planet – not financial statements.

The Impact Foundation

While the Value Reporting Foundation is figuring all that out, we need an Impact Foundation or a Sustainable Development Foundation. This could include the GRI and its Global Sustainability Standards Board (GSSB), the World Benchmarking Alliance, the CDP and similar initiatives seeking to address corporate impacts on sustainable development. They could keep their own identities, but develop synergies through an umbrella foundation. The Foundation (members) could (continue to) work with the various UN bodies that have developed tools, guidance and Standards to help shift corporate and investment activity to address the SDGs, perhaps in a more formal, structured way.

The UN bodies could perhaps use their relationships with Stock Exchanges and the parts of national governments working on the SDGs to make sustainability reporting Standards mandatory. (Contrary to what you might think from reading the IFRS Trustees Consultation Paper the GRI’s governance and due processes are robust and with the multi-stakeholder and multi-region input particularly fit for purpose.)

The GRI’s press release on the formation of the Value Reporting Foundation notes:

Sustainability reporting is the practice by which they disclose their significant economic, social and environmental impacts. This information is critical to inform decisions for a wide range of stakeholders, ranging from employees to policy makers and from customers to investors.

GRI [emphasis added]

Business can’t develop a value creation strategy without understanding their positive and negative impacts on sustainable development and achieving the SDGs. That requires a robust management approach to engaging stakeholders, identifying material issues, developing strategy cognisant of sustainable development risks and opportunities and sound governance oversight.

Investors should care that companies are accountable for these things (report them) and report performance and targets that are cognisant of the SDG targets and planetary boundaries.

The Impact Foundation would not have credibility if its governance structures were connected to those of IFRS, but there could be an independent co-ordinating body across the IASB, Value Reporting Foundation and Impact Foundation.

The GRI GSSB Standards should take precedence over those of the Value Reporting Foundation in being made mandatory, along with the TCFD recommendations. The GRI (and other bodies) working on impact on sustainable development already have relationships with regulators (although you wouldn’t think so from a read of the IFRS Foundation Trustees Consultation Paper on Sustainability Reporting). The IFRS Foundation might have additional relationships that it can bring to bear. These standards focussing on impact on the environment, society and the economy should take precedence because:

a) unless we address sustainable development value creation is irrelevant and impossible.

b) there are a lot of things for the Value Reporting Foundation to figure out – eg what is value, what are the drivers of value, how do we measure it?

c) integrated thinking needs to encompass sustainable development.

d) they are the longest established and most used.

In this video I discuss three key concerns with proposals in the IFRS Foundation Trustees Consultation Paper on establishing a Sustainability Standards Board

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  1. J Robert Gibson says:

    Dear Carol,
    Thank you for your post. I’ve spent the years since SASB and were launched teaching ESG Management & Reporting to undergraduates.
    I written a paper on where I believe corporate reporting should go and would like to email it to you. Please can you tell me an email address I can send it to.

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