Investors, employees, and customers are looking to see what a company's purpose is and how they are implementing this purpose through an environmental, social and governance (ESG) framework and how this can be reported.
ESG issues continue to draw great interest from both companies and investors, but despite its prevalence there remains confusion around the topic. In particular, companies face the challenge of demonstrating long-term value creation without a generally accepted international framework for the reporting of ESG factors. In January 2020, the World Economic Forum (WEF) in collaboration with Deloitte, EY, KPMG and PwC (the Big Four accounting firms) published a proposed set of universal ESG metrics and disclosures.
Findings from Consultation Phase
Following the January meeting in Davos, the WEF and Big Four embarked on an intense period of consultation with corporates, investors, standards setters and other key stakeholders in the ESG ecosystem.
In the consultation draft, they noted: 'The objective would be for IBC companies to begin reporting collectively on this basis in an effort to encourage greater cooperation and alignment among existing standards as well as to catalyze progress to-wards a systemic solution such as a generally accepted international accounting or other reporting standard in this respect.'
The New and Revised Core Metrics
The results after gathering all the feedback and suggestions from global companies and investors is a set of 21 core ESG metrics/disclosures, and a set of 35 expanded metrics and disclosures. Of the 22 metrics that were originally put forth, 17 of them were modified, one was replaced, and one was removed.
The revisions resulted in more precise metrics and disclosures. For example, the diversity metric was modified to represent the importance for diversity indicators beyond only gender. Some metrics were modified to reflect the investors' strong preference for fewer ratios and more quantitative data and absolute values.
Almost all of investors who were part of the consultation acknowledge the importance of reporting on the metrics that are material and specific to each company's industry, but they are also supportive of consistent and comparable ESG re-porting. Additionally, most investors feel that ESG reporting should be included in a company's annual report.
On September 22nd at the fourth annual Sustainable Development Impact Summit, the World Economic Forum released a paper (Measuring Stakeholder Capitalism) with the revised set of universal ESG metrics and disclosures to measure stake-holder capitalism.
A Path Forward for Companies
I urge your companies to discuss what WEF and the Big Four have proposed, and to make a start. I strongly encourage companies to report on the entire set of 21 core metrics and the expanded 35 metrics. For the metrics that are not material to your industry or too difficult to implement, perhaps due to data availability or legal concerns, an explanation should be provided for those metrics.
These metrics are not reinventing the wheel and don't seek to drive out other ESG frameworks. Rather, the metrics are building upon the extensive and rigorous work that has already been done by these other frameworks. WEF and the IBC have attracted support from the leading private ESG standard-setters, including SASB, the Global Reporting Initiative (GRI), the Carbon Disclosure Project (CDP), the Climate Disclosure Standards Board (CDSB), and the International Integrated Reporting Council (IIRC).
According to the WEF, 'The Forum's IBC effort is not intended to replace or displace the industry-specific ESG metrics that investors need and that markets have begun to coalesce around. These are complementary and mutually reinforcing'not competing' initiatives.' The growing amount of ESG research and awareness is a win-win scenario for other frameworks, companies, investors, and society.
What Others Are Saying
It can be helpful to see what leading corporate CEOs are saying about ESG principles and the steps to operationalize them into their respective companies.
For example, Michael Wirth explained Chevron's three initiatives for combatting climate change on CBNB in January 2020, Goldman Sachs CEO, David Solomon, announced on CNBC in January 2020 the firm 'won't take companies public that don't have at least one diverse board member'. James Quincey, CEO of Coca-Cola, discussed the company's efforts to reduce plastic on CNBC in December 2019:
If we can get [chemical recycling] to scale ...then we can collect all the low-value waste, the marine waste, the sachets, and turn it into brand new plastic ' particu-larly high-value plastic ' and that will be a breakthrough. ' James Quincey, CEO of Coca-Cola
Clearly, we can see from the range of industries—big oil, investment banking, and beverage manufacturing—that regardless of your industry, adopting ESG is imperative. The companies within the highest performing top quartile are leaning in and reporting on ESG factors as evidence by some of their specific actions and statements. It is time to embrace the mission and begin the journey, your stakeholders will appreciate the effort your company makes towards measuring and reporting ESG, this is the year to start!
For more information on ESG and measuring stakeholder capitalism, you can register here for a webinar event taking place on October 7th, 2020 @ 11 am ET with World Economic Forum Founder Klaus Schwab, Bank of America CEO Brian Moynihan, and EY CEO Carmine Di Sibio.