There is nothing worse
than a sharp image of a fuzzy concept.
Ansel Adams, photographer.
The question posed in the title may seem to some to be rhetorical. No, there can be no competition between
sustainability reporting standards (SASB, GRI, IIRC, etc.). Even though their products cater to the same
market, sustainability information providers, the end users are different.
Nevertheless some, particularly SASB and GRI, behave as if in competition with
each other, which does not help either of them, nor the providers nor the final
users. Time would be better invested in
cooperation.
Is there competition?
In an analysis of this competitive situation, in her post Trump versus Clinton or SASB versus GRI
Elaine Cohen, reports that SASB, in the comments sent about the draft GRI
standards, suggested that “Perhaps GRI efforts
are better place in providing a forum for stakeholders to voice their concerns………rather
than codifying standards……”. Looks
as if SASB was telling GRI “get out of the way”. I do not think this should be
seen as a dismissal by SASB of the notable contribution of the GRI framework to
sustainability reporting, but it is indicative that there is a sense of “competition”
between both sets of standards (not as nasty and consequential as the
competition between Trump and Clinton).
Sustainability information is still a “fuzzy concept”, but
by using the terms “standards” SASB and GRI want to convey a “sharp image”,
after all the connotation of the word “standards” is that of something very
well defined, with consensus among users. Both are guilty of abuse of
sharpening a fuzzy concept. And it all
started with the creation of the SASB, partly fueled by perceived weaknesses in
the GRI “framework”. Even the name was
meant to recall the true and tried financial standards of the FASB and provide
instant credibility by association. By
being “standards”, they would certainly be superior to a “framework”. GRI must have felt threatened as, shorlty
aftert he introduction of G4 framework moved speedily the process of converting
the guidelines for the “preparation of sustainability reports” into
“sustainability reporting standards”.
This was achieved by changing some of the language and rearranging the
content of the framework to look more like “standards”. It convened a group of experts under the
competitive name of Global Sustainability Standards Board, GSSB to guide the
process, although this is far from a
standard setting institution. Now
both institutions have standards. FASB,
SASB, GSSB, any others SBs? Let’s hope that the IIRCouncil does not change its
name to IRSB, Integrated Reporting Standards Board, to enter the “competition”.
This had led both SASB and GSSB (GRI) to rush their
dissemination campaigns, aided by the legion of consultants that make a living
providing training and advice on the use of the standards, with providers and
users of sustainability information as interested onlookers. This rivalry has
helped the dissemination of their products and stimulated the interest of
providers and users, although it has also caused unnecessary confusion as they
are different products for different final users.
Sustainability
information vs. sustainability reports
Some of this
confusion is the result of assuming that sustainability information must be
compiled in a sustainability report.
The preparation of these reports has been heavily promoted by GRI as it
means a growing market for its product.
It has contributed to develop a vast industry of advisors, writers,
graphic designers, photographers, specialized printers, etc. which are now strong
supporters of the adoption of the GRI standards, of the continuity and
indispensability of preparing sustainability reports, and of the updating of
the standards so that the market continues to need their training and advisory
services (disclosure: the author of this article does not provide these services).
They have significant intellectual capital invested in the GRI
framework/standards that needs to be preserved.
But what stakeholders
need is sustainability information, not necessarily complied in a formal,
quasi-standardized report. And this is
where the difference between SASB and GRI is stark. SASB supports the preparation of information
for a very narrow set of users of sustainability information: providers of
financial resources. As such their
concerns are that the information be of interest to the users and be material, defined as having a direct or indirect impact, preferably
tangible, on the financial condition and operational performance of the
company. For SASB the relevant sustainability information is the one that
supports the business case. This information can be presented in many ways,
which are not specified by SASB, except to suggest quantitative and qualitative
(worded as precise as possible) indicators.
The major issue for
SASB is the link and the certainty of the link between the indicator and actual
impact on financial performance. They
go to some length to show that the action contained in the indicator “should”
have a financial impact. But does it? The key is the transmission mechanism
between the action and the impact.
If customers do not care or do not know about the working conditions, or
financial analysts do not consider the issue in their recommendations, or if
investors do not act on the sustainability of the company, the financial impact
may not be realized. To justify the
inclusion of the indicators SASB seeks to provide “evidence of impact”, but the
evidence tends to be derived from academic studies on the “aggregate” of many
firms and on the efficiency of markets in incorporating sustainability
information, not for the particular case of a given company, under its context
and its circumstances. For instance,
reduction of emissions “should” reduce risks and affect the cost of
capital. But, it this the case of the
specific reporting company? Does the
transmission mechanism work? The
expectation is that the impact will eventually be realized, hence in a long
term view, the sustainability action is material.
GRI takes a broader
view of stakeholders and includes all of them, and prompts the identification
of the issues that affect or are affected by them (very different definition of
materiality from SASB). But the
criterion for issue inclusion is the interest of stakeholders in knowing the
information and potentially acting on it, not necessarily on the potential
financial impact as is the criteria of SASB.
Even though the GRI standards call for prioritization of material
issues, it wants to serve all needs of all users, calling for the preparation
of (extensive) sustainability reports that, in general, serve none of
them. But by now the “sustainability market”
has come to expect the publication of a sustainability report under GRI
framework/standards and not doing so is considered a lack of respect for
stakeholders or even an indication of poor sustainability performance. Actually one of the most used indicators for
the progress of sustainability is the number of reports published or the fact
the reporting is being extended to SMEs (even though it may not be cost
effective for these firms), among others. And it
has become a must, as sign of responsibility, of “compliance”, of prestige, to
follow GRI framework, now standards.
And what is the value
added of the Integrated Reporting framework? It overlays both SASB and GRI standards, supporting
and expanding them. It promotes the
preparation of reports with an expanded set of financial and non-financial
information (that includes sustainability), by proposing to report the
contribution of the company in the advancement of the six capitals (Financial,
Manufactured, Intellectual, Human, Social and Relationship and Natural
capital), not just the impact on financial
capital as in the case of SASB or the scattered reporting, with non-explicit
impacts, of GRI. It one could
overcome the problems of measurement of impact on the six capitals, it would be
the ultimate report on the contribution
of the company to society. This
shows the direction of financial and non-financial reporting, even if the
measure of this contribution is still in its infancy.
Compete or “collaborate
to compete”? [i]
Contrasting the approaches to sustainability information of
the targeted SASB information to a
set of stakeholders with the all-inclusive (in spite of its efforts to focus on
material issues) dispersed requirements
of GRI, in the wider but focused context of the contribution to the six
capitals of the IIRC one could conclude that effectiveness, in the long
run, suggests that efforts should be directed at producing and disseminating
targeted information to the different stakeholders along the lines of the six
capitals, i.e. “six SASBs”, one for each capital. In our previous article Is competition between sustainability reporting
standards healthy? we argued for the availability of
sustainability information to fill the needs of stakeholders. With the cooperation and integration of …
“….these standards companies could prepare information, almost like a
“universal report” in a comprehensive online information dataset which would
allow each stakeholder to pick and choose the information that is material to
them and let the software compile the report, including qualitative
descriptions and quantitative data or indicators. From all of that WE, the
stakeholders, will determine what is material to us in our decision making, which is the materiality that matters.”
And if the information were to include the impact on the
capitals, it would significantly enhance its usefulness. So far the indicators and the narrative, even
if standardized, leave a lot of the work in the hands of the users. Eventually
companies will move to make this impact more explicit.
In the meantime the proliferation of “standards” is not
helping to advance the cause of sustainability, distracting the scarce
resources within companies and the limited capacity of the users in information
processing and understanding its implications. [ii]
[i]
In Latin, CUMPETERE, the name of my consulting firm.
[ii]
And in the confusion many institutions are proposing other models for
sustainability information, the latest of which is the proposal of BSR in Triangles, Numbers, and Narratives: A
Proposal for the Future of Sustainability Reporting.
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