World Economic Forum and Big Four present new framework for stakeholder capitalism metrics

Back in January, in Davos, the World Economic Forum International Business Council— a group of 120 of the largest businesses—together with the Big Four accounting firms, announced a new initiative  “to develop a core set of common metrics to track environmental and social responsibility” and released a draft set of metrics for review and consideration. (See this PubCo post.) Last month, the final results, the IBC Stakeholder Capitalism Metrics, were presented in this whitepaper, “Measuring Stakeholder Capitalism—Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.”  The preface to the whitepaper observes that we are “in the midst of the most severe series of challenges the world has experienced since World War Two. The COVID-19 pandemic has exposed the fragility of our global systems. It has exacerbated underlying economic and social inequalities and is unfolding at the same time as a mounting climate crisis…. The private sector has a critical role to play.”  The whitepaper is presented in that larger context, as an effort

“to improve the ways that companies measure and demonstrate their contributions towards creating more prosperous, fulfilled societies and a more sustainable relationship with our planet. It also recognizes that companies that hold themselves accountable to their stakeholders and increase transparency will be more viable—and valuable—in the long-term. The culmination of a year’s effort from contributors on every continent, this work defines the essence of stakeholder capitalism: it is the capacity of the private sector to harness the innovative, creative power of individuals and teams to generate long-term value for shareholders, for all members of society and for the planet we share. It is an idea whose time has come.”

Quite a heavy lift.  But will the framework be widely adopted?

Background. Currently, companies that want to provide sustainability disclosure must decide among different reporting frameworks, such as SASB (Sustainability Accounting Standards Board) (see this PubCo post), TCFD (Task Force on Climate-related Financial Disclosures) (see this PubCo post), CDSB (Climate Disclosure Standards Board), GRI (Global Reporting Initiative), IIRC (International Integrated Reporting Council), and others.  These frameworks provide a variety of  standards and approaches, requiring companies to disclose somewhat different information—all of which creates an impediment to consistency and comparability.  In addition, concerns have been raised that non-financial ESG information that may materially affect business performance and business risks are not analyzed and reported with the same rigor as financial information.

The new initiative is an effort to address this issue.  The IBC “flagged the existence of multiple ESG reporting frameworks and the lack of consistency and comparability of metrics as pain points preventing companies from credibly demonstrating to all stakeholders their progress on sustainability and their contributions to the SDGs [UN’s Sustainable Development Goals].” To address those concerns, the initiative takes the opposite approach from that taken by the SASB framework (which provides separate sustainability accounting standards for each of 77 industries), instead seeking to “identify a set of universal, material ESG metrics and recommended disclosures that could be reflected in the mainstream annual reports of companies on a consistent basis across industry sectors and countries.” To that end, the project

“defines a core set of ‘Stakeholder Capitalism Metrics’ (SCM) and disclosures that can be used by IBC members to align their mainstream reporting on performance against environmental, social and governance (ESG) indicators and track their contributions towards the SDGs on a consistent basis. The metrics are deliberately based on existing standards, with the near-term objectives of accelerating convergence among the leading private standard-setters and bringing greater comparability and consistency to the reporting of ESG disclosures.”

A key aspect is that “the metrics should be capable of verification and assurance, to enhance transparency and alignment among corporations, investors and all stakeholders.” The wider objective was—and remains—“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 towards a systemic solution, such as a generally accepted international accounting standard in this respect.”

In what might be a controversial aspect of the framework, the whitepaper advocates that, instead of discussing the various metrics in a separate sustainability report, as is the more common practice, the discussion should be mainstreamed. (Notably, the SEC has adopted requirements for disclosure of human capital resources as part of the business narrative, although no specific metrics are mandated. See this PubCo post.)  With the initiative,  the IBC hopes to trigger

“faster progress towards the creation of a more formal, systemic solution, such as a generally accepted set of international accounting standards for material ESG and longer-term value considerations. Accordingly, companies are encouraged to begin reporting on the recommended core metrics, where relevant and possible in mainstream corporate disclosures (annual reports to investors and proxy statements). Addressing ESG metrics within a company’s annual report (variously known as the MD&A, the strategic report, the integrated report) will ensure that consideration of material ESG factors is on the board’s agenda and is part of the overall corporate governance process.”

The whitepaper disclaims any intent to discredit separate sustainability reports, contending that they “often provide more comprehensive information at the industry- and company-specific levels, tailored to the interests of stakeholders beyond investors.” Rather, the recommended metrics are intended to “help companies align their annual financial reports and annual sustainability reports in order to provide investors and other stakeholders with clear and coherent performance metrics, along with analysis of risks and future goals.”

Metrics. As noted above, the draft metrics were initially presented in January, followed by a period of consultation and feedback among more than 200 companies, investors and other key players.  As in the draft, the metrics in the final version (which are set out in full in the Appendix to the whitepaper, including a rationale for each metric and additional commentary and advice) are organized under four categories, or “pillars”: Principles of Governance, Planet, People and Prosperity. Within each category, there are two sets of metrics—21 core and 34 expanded metrics and disclosures, all organized around select themes.

The core metrics are more “established or critically important,” primarily quantitative metrics and disclosures, focused primarily on activities within the company, many of which are already reported by companies in different formats or can be obtained with reasonable effort. The expanded metrics are less established and “have a wider value chain scope or convey impact in a more sophisticated or tangible way, such as in monetary terms. They represent a more advanced way of measuring and communicating sustainable value creation,” and are designed to provide “a pathway for companies to continuously improve the depth, breadth and sophistication of their reporting on issues of economic, environmental and social concern.” For example, reporting output metrics (such as tons of air pollutants) does not necessarily provide information about their impact: “the same volume of air pollution emissions will adversely affect the health of more people in a densely populated city than in a rural area. Simply reporting the pollution output would tell us relatively little about the true impacts of a business or the effectiveness of its efforts to reduce those impacts.”

For the most part, the metrics were selected for their “universality across industries and business models” from among existing standards and disclosures; however, “the intention is not to replace relevant sector- and company-specific indicators. Companies are encouraged to report against as many of the core and expanded metrics as they find material and appropriate, on the basis of a ‘disclose or explain’ approach.”

The whitepaper also presents a concept of “materiality” that extends beyond financial impact: the metrics “reflect not only financial impacts but ‘pre-financial’ information that may not be strictly material in the short term, but are material to society and planet and therefore may become material to financial performance over the medium or longer term. Materiality is a dynamic concept, in which issues once considered relevant only to social value can rapidly become financially material. In this sense, sustainable value creation lies at the intersection of social and corporate value.”

The four pillars are:

Principles of governance. This pillar recognizes that the shift in understanding of the purpose of a corporation to focus on long-term value creation has implications for the meaning of good governance: governance is key to achieving long-term value “by aligning and driving both financial and societal performance, as well as by ensuring accountability and building legitimacy with stakeholders.”  Core metrics include corporate purpose, composition and quality of governing bodies, material issues affecting stakeholders and stakeholder engagement, ethical behavior (including anti-corruption policies and procedures and ethics advice and reporting mechanisms), and risk and opportunity identification and oversight.

Planet. Businesses depend on and affect the natural environment; dependences “need to be managed effectively to ensure business continuity. Business impacts on the environment can result in significant societal harm and the response to these impacts by customers, regulators and other stakeholders can create material business risks and opportunities.”  Core metrics for this pillar address greenhouse gas emissions, TCFD implementation, land use and ecological sensitivity and fresh water consumption in water-stressed areas.

People.  How does a company ensure that its workforce is engaged, skilled and healthy? These attributes are necessary to create “both financial and non-financial value that is critical for a company’s business performance and competitive advantage, while enabling it to mitigate risks, maintain a license to operate and strengthen stakeholder relationships.”  Both COVID-19 and the fight to overcome systemic racism have highlighted a number of issues related to the workforce.  To illustrate the concept, copied below are the core metrics for this category. They might also provide useful guidance for those considering how to respond to the new SEC requirement to disclose human capital resources information. (See this PubCo post.)

To illustrate more specifically, copied below are core metrics for the category of “People”:

Prosperity.  The report links prosperity with dignity and the fight to end poverty and inequality, describing it in terms of economic growth, innovation and transforming business models to create shared value and shared prosperity and equitable growth. Core metrics include the number and rate of employment (new hires, turnover), economic value generated, government assistance, financial investment contribution, R&D and total tax.

The IBC hopes that “these recommended metrics and disclosures will enable each company to provide the narrative and the numbers that its investors and stakeholders need to track that corporate journey towards sustainable value creation.” Notably, the five leading voluntary framework- and standard-setters—CDP, CDSB, GRI, IIRC and SASB—have now also committed to working toward a joint vision and have indicated that their work and this IBC initiative “are fundamentally complementary and could form the natural building blocks of a single, coherent, global ESG reporting system.” Whether through this IBC framework or something assembled by the five standard-setters or a combination of the two, the question remains whether the result will be a framework that is sufficiently universally accepted that the SEC would be willing to refer to it—much like COSO for internal controls—in some type of disclosure mandate.