How a community of solvers can help make rapid progress on ESG transparency

One of the great things here at COP26 in Glasgow is the chance to connect with people who are passionate about many things: the world, ESG, climate and, surprisingly to some, corporate reporting. This last topic - which was once the preserve of governance committees, accountants and investors - is now a mainstream subject for everyone who wants to tackle climate change. A consensus is forming around the need for more consistent, comparable, transparent non-financial reporting so stakeholders can use their dollars, voice and power to support organizations that are helping deliver the net zero transition. It goes beyond climate too. Stakeholders, including investors, want to make more informed decisions on who is making progress and who is falling further behind with respect to many topics of interest.

That’s why yesterday’s announcement of the creation of the International Sustainability Standards Board (ISSB) is so significant. Last November, I argued at the International Integrated Reporting Council (IIRC) for an Apollo programme for international reporting; transforming the non-financial reporting system at unprecedented speed. From yesterday, for the first time, there will be a pre-eminent body dedicated to setting out investor-centric ESG standards. And if the timeline the ISSB indicated holds, from next summer we will have new ESG reporting standards that companies can use, and investors can trust, as they make their respective decisions.

This timeline is pressing, because the net zero transition is urgent, but also because the market need is high. Our recent survey of 325 investors from around the world found that around half would divest from companies they believed were failing to deliver on ESG commitments, but only around one-third thought the quality of ESG reporting is good enough. How can they make good investment decisions without good data?

That is why reporting matters. It is not about a philosophical comment to transparency as an intrinsic good, instead it is about what transparency does. It drives behaviour. Management teams can be held to account for delivering on their commitments. Investors can mobilise capital and make a difference based on accurate information. Policy makers, employees and customers can make better decisions thanks to better information. Enhanced reporting won't just describe how well the system is addressing climate change, it will incentivise the system to tackle climate change.?

The ISSB is just one part of the architecture we need to address the societal and investor imperative, but it is crucial and I want to pass on my thanks to everyone who has helped make this happen. However, now the harder work starts!

The need for speed

To make the most of this moment, there can be no let up in the pace. It is encouraging that the ISSB has already released prototype standards in advance of the more formal ‘exposure drafts’ they are planning to share later in the year. That is a new process, and I hope it is a sign that they are willing to be unorthodox in order to deliver quality at speed.?

It will take real determination to deliver impact quickly, but I believe there are three important factors that can make it easier.

First: collaboration. The ‘community of solvers’ is an idea we put at the heart of our new strategy at PwC, and it is just as relevant here. There is an old adage that ‘if you want to go fast, go alone; but if you want to go far go together’. I don’t think trade-off applies in this instance. The only way to make rapid progress is as a community - breaking down silos and bringing together all the different forms of expertise and authority you need in one team.?

This is not about taking action in parallel rather than series. Instead, it is about taking action together. The ISSB should be one of the world’s greatest conveners, helping broker alignment between bodies from the SEC to the European Commission, the PRI to the IASB. We don't just need standards to exist, we need them to effectively be required - whether by market forces or regulators. That will take collaboration, as well as a willingness to compromise, land decisions based on the input from many and start a new path forward. We cannot let the search for perfection get in the way of moving with speed to address the systemic issues our planet is facing - pulling all levers to change both the speed and the angle of the change curve.

Second, it is vital the ISSB understands the link between trust and sustained outcomes. Again, these are concepts we have put a lot of time into at PwC and we see relevance for our stakeholders as well as our clients. When someone reports against a standard, it should be a signal that allows stakeholders to trust that the organization has delivered on something important. That means the ISSB standards need to capture things that really matter to investors.?

The goal is a set of standards that are trusted widely and provide an antidote to the greenwashing that is damaging trust and undermining the ability for investors to reward outcomes.

Third, while I think the ISSB is right to focus on climate initially, that shouldn't be a barrier to progress on other topics. Issues around social inclusion, diversity, supply chain integrity and other key factors are all deeply interconnected and remain important to society and to investors. Our recent investor survey found that climate was the top ESG issue investors want better data on, but the next three places were all taken up by ‘S’ issues. Not surprising when one thinks of the challenges related to COVID-19, talent and the needs to enhance our education systems around the world.?

I look forward to seeing a roadmap from the ISSB that lays out how they expect to progress on these other issues. In the meantime, for issues beyond climate not yet addressed by the ISSB, companies should consider using the WEF Stakeholder Capitalism metrics which identify a number of existing standards across the Sustainable Development Goal agenda. There is no reason to wait!

It is important to be clear what the ISSB is. By focusing on just one stakeholder group - investors - and initially on one issue - climate - the ISSB has the ability to make rapid progress on an urgent issue. However, that is the foundation not the apex. The next steps include policy makers taking action to encourage, or even require, disclosures (as we are seeing in the European Union), an expansion of topics with an investor focus and, crucially, the expansion of standards to meet wider stakeholder needs. Assurance standards, expectations and quality will also need to keep up. The entire system needs to evolve to better serve the needs of the world.

This is a big step forward and an exciting moment in this debate. It would be easy to get sucked into the technicalities, but at a high level this is the best chance we have to create trusted non-financial information about the way companies are responding to climate change. That information will power investor decisions, stakeholder decisions and societal decisions. We look forward to working with the ISSB, and the many others involved, in moving this forward at pace.