(This blog was originally published as part of the FT Moral Money Forum’s report, “Measuring What Matters: The Scramble to Set Standards for Sustainable Business,” co-sponsored by High Meadows Institute. The full report can be read here.)
Let’s be clear about mandated standards for financial and sustainability reporting, especially what they are and what they are not.
Standards are a social construct. They are a consensus about how to represent a company’s performance. They are a baseline for analysis and dialogue that can be supplemented in many ways.
They are not, however, a perfect scientific solution that stifles debate.
Reporting standards are imperfect and must be viewed as a basis for contention and evolution. As such they are frustrating but essential. They level the playing field for both companies and investors.
One argument against sustainability reporting standards is that they do not capture the uniqueness of a company. The same is said about accounting standards. There is some truth in this assertion but the effect is exaggerated.
Standards are inevitably imperfect but they do enable comparability, which benefits both companies and investors. Reporting to a set of standards does not stop a company from providing additional information – and in fact most do.
The controversial “non-GAAP” earnings measures in accounting is one example. Another instance is how companies voluntarily disclose information in their quarterly calls and investor meetings that is not required, such as revenue and earnings by product line and market share.
So should the application of standards be voluntary or mandated? Here governments can be weak or strong in their approach.
In the former, a government endorses a set of standards but does not require companies to report against them. This is similar to St Augustine’s plea: “O Lord, make me chaste – but not yet.” In such a situation, companies may choose to report in some other way or not report at all, and the benefit of comparability and having information from all listed companies, so essential to investors, is lost. Standards, therefore, are most effective if they are mandated.
Today the best hope for a global set of standards for sustainability reporting is the Sustainability Standards Board (SSB), which is being established by the IFRS Foundation under the direction of its private and public sector trustees.
To varying degrees governments around the world, including the US and those in the EU, have indicated support for the SSB. This is positive but far from sufficient.
If the EU eventually decides to mandate its own reporting standards through its Non-Financial Reporting Directive, the hope for global standards will be lost. If the US endorses standards set by the SSB but makes them voluntary – as is the case with US GAAP versus the International Financial Reporting Standards – then that is better than setting up its own standards.
Establishing a base set of global sustainability reporting standards that governments and institutional investors can mandate or require to be used would be an enormous step forward, albeit still an uncertain one.
This, though, is necessary if we are to shift capital allocation decisions so that they support a stable long-term economy and society, and a natural environment conducive to both.
For this to happen, performance targets have to be set, such as being net-zero by 2050 in greenhouse gas emissions. Standards have nothing to do with target setting. Without standards, however, there is no way to compare a company’s performance over time or its performance in relation to its peers.