Why Collaboration By IFRS Foundation And GRI Is A Progressive Step For Corporate Transparency

On March 24, 2022 the IFRS Foundation (the Foundation) and the Global Reporting Initiative (GRI) published a press release announcing “a collaboration agreement under which their respective standard-setting boards, the International Sustainability Standards Board (ISSB) and the Global Sustainability Standards Board (GSSB), will seek to coordinate their work programmes and standard-setting activities.” I can’t tell you how excited I was to read this! I must also admit I was rather surprised and that this came out of the blue to me. I’m someone who tries to keep his ears to the ground in the land of sustainability reporting standard setting.

I was not surprised about the immediate reaction to a simple two-page press release announcing a Memorandum of Understanding (MoU) which “represents the latest development in efforts to consolidate or align multiple international initiatives covering sustainability reporting into a more cohesive approach for the benefit of companies, investors and society at large.” The GSSB, focused on multi-stakeholder sustainability reporting, will collaborate with the ISSB whose mission is to develop a global baseline of investor-focused sustainability disclosures for the capital markets. To make this collaboration a substantive one, each organization “will join the each other’s consultative bodies related to sustainability reporting activities.” To be clear, this is a collaboration agreement, not a merger.

As GRI CEO Eelco van der Enden put it in the press release, the MoU sends “a strong signal to capital markets and society that a comprehensive reporting system, which combines financial and impact materiality for sustainability reporting, is possible on a global scale. Emmanuel Faber, Chair of the ISSB, succinctly summed up the benefits of alignment by saying, “using the standards set by the ISSB and GSSB together will offer a complete and compatible suite of sustainability disclosures.”

What’s not to like? A lot, apparently. Some bemoaned the two pillar framing of the press release with its distinction between sustainability reporting for investors vs. multi-stakeholder sustainability reporting. The ever present single vs. double materiality debate, one which seems to become more heated by the day. I agree with those who think this framing is a bit simplistic, but this is because the line between the two is elusive and ever changing. And, hey, this is just a press release. Behind it is an MoU so how about we give them a chance to do some work before getting too exorcised over a press release?

More complex is the views regarding the ISSB and GRI. Supporters of the GRI wondered why they didn’t have a seat at the table from the get-go in the same way as the Value Reporting Foundation (a merger of the Sustainability Standards Board [SASB] and the International Integrated Reporting Council [IIRC]) and the Climate Disclosures Standards Board (CDSB). Some were glad they didn’t. When GRI and the European Financial Reporting Advisory Group (EFRAG) announced on July 8, 2021 a “Statement of Cooperation” to work together on developing the standards for the EU’s “Corporate Sustainability Reporting Directive (CSRD)” this led to a framing of a single materiality (ISSB) vs. double materiality (CSRD) standard setting contest.

Then the GRI announces its collaboration with the ISSB. There are various ways to interpret this. One is that the GRI is weakening in its commitment to double materiality and sold out EFRAG. Another is that the ISSB was duped by the GRI into starting down the slippery slope of double materiality. The more realistic interpretation is that the GRI and ISSB are clearly defining their roles and agreeing to work together to make life easier for companies. These standards will have varying degrees of single and double materiality. The CSRD may end up with some standards that don’t clear the bar (yet) for the ISSB.

The rise of universal owners and their recognition of systemic risks from things like climate change and income inequality suggest that the ISSB’s standards won’t easily fall into a single materiality box. Witness the language in the March 31, 2021 “Exposure Draft: [Draft]: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information.” It states: “Sustainability-related financial information also depicts the reputation, performance and prospects of the entity as a consequence of actions it has undertaken, such as its relationships with, and impacts [emphasis mine] and dependencies on, people, the planet and the economy, or about the entity’s development of knowledge-based assets.” “Impacts” is what the advocates of double materiality are rightly concerned about.

Some decried the timing of the press release since it came only three days after the U.S. Securities and Exchange Commission issued its own press release: “SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors.” (The proposed rule is a fulsome 510 pages. For those of you without the time to read it in full see these excellent summaries by Bhakti Mirchandani and Professor Shivaram Rajgopal.) The concern here is that this would complicate the already highly politicized U.S. environment (no pun intended) around climate change and reporting on it. Would the ISSB/GRI collaboration provide ammunition to critics like the ever-entertaining SEC Commissioner Hester M. Peirce whose latest opus is “We Are Not the Securities and Environment Commission—At Least Not Yet.” Or freak out the business community that “Before you know it, you’re going to be required to report on every sustainability issue under the sun.” The GSSB’s standards are voluntary; they are not an ISSB requirement. And this is all before EFRAG announces its proposed standards later this month.

Gee. I think U.S. critics of climate reporting have plenty of ammunition in those 510 pages that they don’t need any help from the ISSB and GRI. We have angry articles in the conservative press like the one by Richard Vanderford in the Wall Street Journal who rails that the SEC’s proposed rule “could dramatically increase the exposure of these businesses to costly securities litigation.” So what to do about that? Launch lawsuits against the SEC, of course! When it comes to litigation, America is the Leader of the Pack with no country even a close second in the race.

In a guns ablazin’ letter of March 25, 2021, West Virginia Attorney General Patrick Morrisey sent to SEC Commissioner Allison Herren Lee when she was acting Chair, after three pages of fulminating about how this proposal violates the First Amendment guaranteeing freedom of speech, he threateningly concludes “West Virginia will not permit the unconstitutional politicization of the Securities and Exchange Commission. If you choose to pursue this course, we will defeat it in court.” With no disrespect to the ISSB and GRI, let’s be honest. You really have no value to add here. Thank you very much but we don’t need amateurs involved in our high-profile litigation wars. Plus, I doubt that Mr. Morrisey and his ilk even know you exist. Finally, the U.S. doesn’t even follow the International Financial Reporting Standards of the International Accounting Standards Board so why should we be bothered with an ISSB/GRI collaboration?

Getting back to the core issue, reading the press release reminded me of the comment letter to the Foundation’s consultation regarding the establishment of the ISSB I submitted on December 31, 2020 with my Oxford colleague Professor Richard Barker. The last question was an open-ended one giving the letter writer the opportunity to opine on any related topic. Barker and I suggested that the GSSB be “spun out” of GRI and established as an independently funded standard setting body. We saw a clear complementarity between the work of the ISSB and GSSB and noted that “There would of course need to be some form of structured and formal collaboration between the SSB and GSSB, so that a rigorous approach is taken to addressing dynamic materiality.” While our suggestion isn’t exactly how things have evolved, the spirit of our suggestion has now become flesh.

I’ve been tilling these fields of sustainability reporting for 30 years. Here are three things I’ve learned.

The first is that anything done to move the ball forward makes at least some people mad. Some virulently so. It can be the language that is used, the organization that is doing it, the stated mission of the organization, and the relationships the organization has with other ones. As with everything in life, no good deed goes unpunished.

The second is that by its inherent nature, standard setting is a process fraught with tension and conflict. Complex technical issues need to be addressed and good arguments can be made for different approaches. Personal and institutional values and objectives always factor in. Compromises must be reached for a standard to be set. By definition the standard setter can’t make everyone happy. Some want more. Some want less. Some want something completely different. Some just want to be professional critics (who have no constructive suggestions) as a form of self-aggrandizing identity posturing.

The third is that there is never a scientifically “right answer.” As I have written before, reporting standards are a social construct. While there are technically worse answers, there is no indisputable technically right one. Even a modicum of knowledge about standards for financial reporting makes this clear. They are created, disputed, interpreted, and changed. They are not immutably frozen in well-defined concrete. And this is after decades of experience with them.

Let me conclude by putting this in a short historical perspective—short as in terms of just a few years. In October 2018 Barker and I published the Green Paper “Should FASB and IASB be responsible for setting standards for nonfinancial information?” This paper was the basis of a heated debate at the Oxford Union. The question was whether standards for sustainability reporting should be left up to market forces or established through a process that would have regulatory support. Those in favor carried the day by about two-to-one. This was a dramatic shift since even just five years ago the general sentiment was the market forces would do the job.

Well, they didn’t. Just as they didn’t with financial accounting standards. There has been a momentous shift from arguing about market forces vs. regulation to arguing about who should be responsible for developing the standards to be enforced by regulation. We shouldn’t forget this.

I obviously have no idea how things are going to sort out over the next couple of years on a topic that has gone from sideline to mainstream. There will be heated (and hopefully mostly constructive) debates regarding all of the initiatives producing standards for sustainability reporting. On top of that will be the question of if and how they fit together. Where are they similar and where are they different?

Let’s get real. This process of social construction will be a complex, messy, and ongoing one. Standards for reporting on climate aren’t a silver bullet, guaranteed to deliver a net-zero world by 2050. But they are a necessary part of the solution to be bolstered by and supportive of emissions reduction targets, shareholder engagement, prodding by NGOs, carbon taxes, and intelligent public policy supporting an energy transition. Yes, let’s argue and respectfully disagree with each other. But let’s do so in good faith and not let the impossible perfect be the enemy of the much needed good.

Kudos to the ISSB and GRI. We should all wish them the best and provide our support.