We are in the middle of a boom for ESG reporting, driven by the growing realisation of the risks arising from climate change and inequality, a realisation that has now permeated into capital markets. Every day sees a new tool for ESG or SDG or Sustainability Reporting. Recent proposals for a European Corporate Sustainability Reporting Directive and for IFRS to establish a Sustainability Standards Board alongside the International Accounting Standards Board will make some form of non-financial reporting as commonplace as financial reporting.
Though there are some murmurs of disquiet, both from those that argue all this is an unnecessary burden and from those that argue that current proposals do not go far enough. Olivier Boutellis, the CEO of Accountancy Europe, has recently co-founded North Star Transition which argues:
“ESG’s ascendancy is a strong signal that the finance community has begun to recognise the convergence of societal and commercial value. However, the current approach is not going to deliver in the way we need: it focuses on “doing less harm” rather than truly delivering transformative societal outcomes, and it exacerbates the multiple crises we now face including the climate emergency, biodiversity loss and social disenfranchisement.”
Others have argued that the focus of ESG is on providing information to investors to help them assess the risk to expected financial returns and perhaps to understand how management are mitigating that risk. But not on understanding the consequences of a business’s operations and its contribution (or not) to sustainability. The UNDP SDG Impact Standards seek to address this by focusing on the processes that an organisation has in place to make decisions that make a positive contribution to sustainability and the SDGs.
Measurement of ESG issues also tends to focus on inputs and outputs, the existence of policies and measures of activities or of sustainability topics but not on the resulting changes to the well-being of people and the planet. Increasingly the shorthand for this is ‘impacts’ but given outcomes and impacts are still used in different ways it’s safer to spell this out. Of course, ESG could be measured based on changes in well-being. The reason given is that measuring outcomes, let alone impacts is too hard. And given it’s the people that experience these impacts that would need to tell us what they were, it’s even harder.
Lessons from the charity reporting framework
In terms of assets or turnover, most charities are considerably smaller than investment funds and corporates and have fewer resources to do all this difficult stuff.
In the UK, the Charity Governance Code, which sets out principles and recommended practice, has a few things to say about this:
1.2 The board can demonstrate that the charity is effective in achieving its charitable purposes and agreed outcomes.
1.4.2 The board evaluates the charity’s impact by measuring and assessing results, outputs and outcomes.
1.5.3 The board recognises its broader responsibilities towards communities, stakeholders, wider society and the environment, and acts on them in a manner consistent with the charity’s purposes, values and available resources.
And there is more in the Charities’ SORP (FRS102):
1.4.2 The report should provide a balanced picture of a charity’s progress against its objectives. For example, it may explain progress by reference to the indicators, milestones and benchmarks the charity uses to assess the achievement of objectives.
1.43. In reviewing achievements and performance, charities may consider the difference they have made by reference to terms such as inputs, activities, outputs, outcomes and impacts, with impact viewed in terms of the long-term effect of a charity’s activities on both individual beneficiaries and at a societal level. Charities are encouraged to develop and use impact reporting (impact, arguably, being the ultimate expression of the performance of a charity), although it is acknowledged that there may be major measurement problems associated with this in many situations.
The last point is important.
Much of the above, in both the Charities’ SORP and the Charity Governance Code, asks charities to report on the effect they are having on people’s lives, in line with objectives but recognising that there may be negative effects. The Charity Governance Code has a higher expectation than the SORP since the SORP acknowledges that there may be major measurement problems.
There may be problems, but measurement problems are not always a barrier to producing useful information, either in the context of making decisions to increase impact or in the context of financial reporting where existence, outcome and measurement uncertainty are all recognised and assessed in deciding on whether information can be disclosed.
In the annual report of the social enterprise FRC Group (where I am a director), the social and environmental information is the majority of the directors’ report in the accounts and audited against ISAE 3000 and AA1000AS. Two audit reports in one set of annual accounts! So I don’t get it, if charities can find ways to do this so can corporates. Charities do because their purpose, and the eco-system around them, is to create changes in well-being. The only reason then that corporates and other businesses do not is because that’s not their purpose.
Given all the debates on mission led, purpose driven business, on broadening performance management to cover impact, on ESG and so on, I am left wondering whether it wouldn’t be a lot easier if we just made all businesses report under a framework similar to charities. This would move us a long way towards reporting performance on managing positive and negative impacts, against purpose and targets. If you can think of any reasons why not please let me know!*The views expressed are the author’s and not ICAEW’s.