Big Four firms release ESG reporting metrics with World Economic Forum

By Michael Cohn for AccountingToday.com

The Big Four accounting firms have developed a set of metrics for companies to use for environmental, social and governance reporting internationally.

The metrics were released Tuesday by the World Economic Forum in conjunction with the fourth annual Sustainable Development Impact Summit, which coincided with Climate Week in New York. They come a week after five ESG standard-setters — the Carbon Disclosure Project, the Climate Disclosure Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council and the Sustainability Accounting Standards Board — agreed to work together more closely on aligning their various sets of standards and frameworks after being urged to do so by international securities regulators (see story).

The ESG metrics are organized around four pillars of principles of governance, planet, people and prosperity. The metrics and disclosures aim to align the existing standards to enable companies to collectively report nonfinancial disclosures.

The metrics and disclosures were developed in collaboration with the Big Four firms — Deloitte, EY, KPMG and PwC — and come after a consultation process with representatives from corporations, investors, standard-setters, NGOs and international organizations. They aim to provide a common set of existing disclosures that lead toward a more coherent, comprehensive global corporate reporting system.

The World Economic Forum also collaborated with the Impact Management Project to bring together the efforts of the five leading independent global framework and standard-setters (CDP, CDSB, GRI, IIRC and SASB) to work toward a comprehensive corporate reporting system and a statement of intent which works as a complement to the common metrics released Tuesday.

“This is a unique moment in history to walk the talk and to make stakeholder capitalism measurable,” said World Economic Forum founder and executive chairman Klaus Schwab in a statement. “Having companies accepting, not only to measure but also to report on, their environmental and social responsibility will represent a sea change in economic history.”

Leaders of the Big Four global firms expressed support for the new metrics.

“The disruptions of 2020 have underscored the critical importance of organizations managing and reporting their impact on the economy, the environment and society, and their increasing connection to long-term enterprise value creation,” said Deloitte Global CEO Punit Renjen in a statement. “Deloitte is pleased to have led the development of the Principles of Governance pillar and collaborated on this project with so many respected organizations. We hope our work supports organizations as they move toward consistent reporting of ESG metrics and disclosures in mainstream annual reports, as ultimately, this is how the business community will make greater progress against the Sustainable Development Goals.”

"The time is now for companies to broaden their engagement with stakeholders," said EY Global chairman and CEO Carmine Di Sibio in a statement. "The combined impacts of climate change, COVID-19 and economic inequality contribute to the urgency for businesses to embrace long-term, sustainable value creation and prioritize the needs of people and planet and the creation of broad-based economic prosperity.”

“As businesses become more acutely aware of their role in addressing societal and environmental issues, moving toward a common set of ESG-focused metrics will help ensure that we all collectively make a difference where it counts,” said Bill Thomas, global chairman and CEO of KPMG International, in a statement. “Reporting on ESG factors like carbon emissions and human rights and other key metrics will not only help inform investors while helping companies control their full corporate value, it has the power to realign capitalism for the benefit of broader society.”

"Robust non-financial reporting is a crucial element of the systemic economic reform the world needs to address issues like climate change and social inclusion, and we were pleased to be able to collaborate on this initiative and lead on the Planet pillar of this work,” said Bob Moritz, global chairman of PwC, in a statement. “Stakeholders — including investors, but also policy makers, consumers and employees — need more rounded, comparable and robust information to make decisions. Get that information flowing, align market incentives against performance on these metrics, and a better tomorrow becomes possible."

Companies view the importance of social, climate and other non-financial factors as crucial for long-term viability and success. A survey by the World Economic Forum found 86 percent of executives agreed that reporting on a set of universal ESG disclosures is important and would be useful for financial markets and the economy.

In conjunction with Climate Week NYC, the International Federation of Accountants and the Association of Chartered Certified Accountants held an online panel discussion Tuesday about the role of finance and accounting professionals in addressing the climate crisis. Eu-Lin Fang, a partner at PwC Singapore, discussed how the firm had made a commitment last week to achieve net zero carbon emissions over the next decade. “Last week, PwC joined the net zero community and made a signed commitment to net zero by 2030,” she said. “What does this mean? This includes a switch to 100 percent renewable electricity in all our offices, energy efficiency measures and improvements in all our offices, cutting the emissions associated with business travel and accommodations. We’re a professional services firm. We try our best not to travel, but we have to travel from time to time. We are also investing in carbon removal projects and natural climate solutions. We know that our footprint is not as large as other companies, but we want to make this commitment nonetheless.”

She said PwC would also support its clients and other organizations in getting to net zero.

Esther van der Vleuten, an assurance partner at PwC Netherlands, talked about the results of a recent IFAC survey. “We conducted a survey amongst our members asking to what extent they’re currently involved in a matter of CO2 reduction,” she said. “The main conclusion is that the topic of CO2 emissions is not highlighted by 75 percent of both clients and accountants. According to the respondents, 76 percent of our clients do not raise the topic of CO2 emissions with their accountants, and the reverse also applied: 71 percent of accountants don’t raise the topic of CO2 policy with their clients. The fact that climate issues are not discussed by public accountants and clients contradicts the outcome that 59 percent of respondents believe that organizations must address the financial impact of climate change in their risk analysis.”

“These are some concrete examples of how this is really impacting business life in so many ways and the role the profession can play within that,” said Jimmy Greer, head of sustainability at the ACCA.

David Wei, managing director of the organization Business for Social Responsibility, also spoke during the IFAC and ACCA panel. He noted that his group’s member companies use risk assessment measures to model various climate-related projects. The risks can be highly uncertain, but impactful to businesses, he noted. “Much will depend on the regulatory environment and much will depend on the outcome of the U.S. election,” he added.

Jane Thostrup Jagd, senior finance lead at the Danish renewable energy company Ørsted, said she believes that International Financial Reporting Standards could be easily expanded to include climate risk disclosures such as those from the Task Force for Climate-related Financial Disclosures. “It should be part of IFRS,” she said. “It could be enhanced just a teeny bit and also include climate risks.”

Mark Carney, finance advisor to the U.K. Prime Minister for COP26 (the 26th UN Climate Change Conference in 2021 in Glasgow, Scotland) and United Nations Special Envoy for Climate Action and Finance, also joined the panel. “Our objective is to get the frameworks in place so every financial decision can take climate change into account, just as they take interest rates or credit risk or or intercash flows into account. But they can also take climate change as one of the fundamental drivers of risk and value for companies and assets around the world,” he said. “That starts with the reporting and extends through to risk management and stress tests and scenario analysis for risk purposes, not just for opportune purposes. And it will extend ultimately to the expectations for the providers of capital and how they will report, whether it's financed emissions, for example, as a number of banks are beginning to make commitments on, or pools of capital.”

He also issued a statement in support of the Big Four's efforts at common ESG metrics. “As the U.K. works in partnership with Italy towards hosting the COP26 climate change conference in Glasgow in November 2021, I welcome the work of the World Economic Forum’s International Business Council in creating a set of common metrics for reporting sustainable value creation,” he stated. “Through this work you are demonstrating to shareholders, stakeholders and society at large that the private sector is committed to measuring and improving its impacts on the environment as part of the transition to a low carbon future. I encourage governments, regulators, the official accounting community and voluntary standard setters to work with the IBC toward creating a globally accepted system of sustainability reporting based on this project’s groundbreaking work."

Investors may welcome such efforts as well. "Efforts to bolster ESG reporting, such as the Big Four’s joint initiative, highlight the growing understanding of ESG’s financial materiality and enable bond investors to make better decisions by increasing transparency and market efficiency,” commented Brendan Sheehan, vice president and senior credit officer in Moody's Investors Service's ESG group.

The Council of Institutional Investors also welcomed standardization of sustainability metrics. “Investors increasingly seek decision-useful, comparable and reliable information about sustainability performance in corporate disclosures in order to better understand how non-financial metrics can impact business and profitability,” said a statement from the group. “CII believes that independent, private sector standard setters should have the central role in helping companies fill that need. Market participants, non-governmental organizations and governments can aid the success of these standard setters by supporting their independence and long-term viability, attributes of which include: stable and secure funding; deep technical expertise at both the staff and board levels; accountability to investors; open and rigorous due process for the development of new standards; and adequate protection from external interference.”

Separately, however, on Wednesday, the Securities and Exchange Commission approved by a vote of 3-2 changes in a shareholder proposal rule, significantly raising the ownership thresholds required to file and resubmit proposals to corporate boards on ESG issues such as climate change, diversity and excessive pay. The Council of Institutional Investors blasted the move.

“The amendments weaken the voice of investors and jeopardize faith in the fairness of U.S. public capital markets by making the filing process more complicated, constricting and costly,” said CII executive director Amy Borrus in a statement. “The result will be fewer shareholder proposals — and that is precisely the goal of the business lobby that pressed the SEC to make these changes. Simply put, CEOs and corporate directors do not like being second-guessed by shareholders on environmental, social and governance matters.”

Two of the SEC commissioners voted to oppose the changes. Commissioner Allison Herren Lee noted that the new rules “will not serve markets well … this will restrict shareholder rights.” She noted that the new rules would mostly affect small investors, saying, “Retail investors will be greatly disenfranchised … the rights of smaller investors is valued at zero.”

Commissioner Caroline Crenshaw said, “Shareholder resolutions are a proven and effective pathway to suggesting changes to management ... today we have shut this down.” She added that “shareholder resolutions drive positive financial performance” and the loss of their voices would cost companies much more than the cost of the current rules. She said the new rules act as if the voices of retail investors are not important. “The implication is that the wealthy are more likely to possess ideas that will impact a corporation.”

An ESG advocacy group called As You Sow also criticized the changes. “The SEC has intervened to disrupt a system that has worked with fairness and integrity for over 50 years,” said As You Sow CEO Andrew Behar in a statement. “Companies have gained deep insight into potential material risks to their businesses courtesy of their shareholder engagements. Investors have had a forum to raise their concerns, assisting companies to outperform. This is an ecosystem based on mutual respect and a common goal: helping companies be as good as they can be. The new SEC rules will force shareholders to escalate to litigation and other means.”