On September 22, 2020, the World Economic Forum (WEF), through its International Business Council (IBC), recommended common standards to aid all companies around the globe, regardless of industry, in their sustainable value creation. The IBC invites all its members, which includes numerous large corporations, to declare their intention to report on these common standards, and encourages the wider corporate community to join them. The IBC standards have been highly anticipated by some market participants because they offer a company-led, universal and consistent approach to reporting environmental, social and governance (ESG)-related information in a standards landscape that is highly fractured.
The Report Describing the Project and Standards.
The IBC released the standards at the WEF’s fourth annual Sustainable Development Impact Summit, with a white paper titled “Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation” (Report). Provisional metrics were previously released at the January 2020 meeting in Davos-Klosters in a consultation draft titled “Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.” The Report was the culmination of over a year’s work, reflecting assistance from the WEF, collaboration with the Big Four, and consultations with companies (including non-IBC members), investors, standard-setters, non-governmental organizations (NGOs) and international organizations.
Metrics and Disclosures. A main objective of the IBC initiative (or the Project) was to identify a set of universal, material ESG metrics and disclosures companies can use when preparing their mainstream annual reports. In addition, the metrics would be capable of verification and assurance. During the course of the Project, 21 core metrics, or Stakeholder Capitalism Metrics, were identified. According to the IBC, these are the more critically important and established metrics, which are primarily quantitative and already being reported by many firms or can be obtained with reasonable effort. The 21 core metrics, which focus primarily on activities within an entity’s own boundaries, include governance body composition and material issues impacting stakeholders and implementation of the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. In contrast, the 34 expanded metrics and disclosures are arguably more tangential, but extend to an entity’s complete value chain scope. The 34 expanded metrics and disclosures include topics such as alignment of strategy and policies to lobbying and Paris-aligned greenhouse gas (GHG) emissions targets.
The Project deliberately drew metrics from existing standards such as the Global Reporting Initiative (GRI) to enable accelerated adoption. Importantly, Project participants hope that an accelerated global adoption will impress, and perhaps influence, regulators, standard-setters, rating agencies and others on the metrics and disclosures the business community believes are important. Currently some market participants wonder whether the IBC’s initiative will spur progress like the ones that preceded the global acceptance of the accounting standards.
Disclose or Explain. The Report encourages companies to consider using as many of the IBC standards as possible in their corporate reports, after screening the standards for materiality. For purposes of this regime, “material” information is defined as “important, relevant and/or crucial to long-term value creation” and not as a legal or regulatory standard. Nonetheless, the Report recognizes that companies may still be subject to reporting requirements (including another standard for materiality) depending on regional regulations or expectations. When a company considers an IBC-recommended standard immaterial, the Report suggests that a company provide an explanation. Lastly, companies are also encouraged to go beyond the common standards and disclose more tailored industry- or sector-specific information.
Four Pillars. The Report organizes the metrics along four sustainability pillars: Principles of Governance, Planet, People and Prosperity, which align with the United Nations Sustainable Development Goals, known as SDGs, as we have described more fully here using the core metrics.
The Project in Context. Given the challenges companies face, such as climate change, workforce issues, the COVID-19 pandemic and societal expectations, the Report states that companies need to strengthen their resilience and ability to operate. The IBC believes companies can continue to thrive “through greater commitment to long-term, sustainable value creation,” including incorporating the interests of their stakeholders.
In 2017, the IBC spearheaded a commitment from more than 140 CEOs to align their corporate values, goals and strategies with the SDGs, to better serve society. The IBC sees the common standards as delivering a means through which any interested CEO and the CEO’s company can meet the commitment to stakeholder capitalism.
The Report adds that investors and stakeholders also expect company reports to disclose non‑financial issues, risks and opportunities with the same discipline and rigor as financial information. In addition, investors desire standardization of non-financial information, resulting in data consistency and comparability.
Soon after the publication of the Report, the Council of Institutional Investors (CII), a U.S.-based organization, released a statement urging companies to disclose their sustainability performance in line with standardized metrics created in the private sector. CII explains that investors desire material information including sector- or industry-related information and support disclosures made with third-party assurances. CII’s members and associate members, which include a wide range of asset managers, asset owners and pension-related entities, collectively have over $40 trillion in assets under management.
Other Key Endeavors.
Development of Comprehensive Reporting System. In a separate initiative that will complement the IBC standards, the WEF joined the Impact Management Project and Deloitte in facilitating a joint statement issued in September 2020 and expressing the intent among five leading independent global framework and standard-setters—GRI, CDP, Climate Disclosure Standards Board (CDSB), International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB)—in creating a comprehensive corporate reporting system, which we previously discussed.
HCM Framework. In August 2020 the WEF, in collaboration with Wills Towers Watson, published a framework in a report titled “Human Capital as an Asset: An Accounting Framework for the New World of Work” to assist companies in measuring and accounting for their workforces, including in the wake of COVID-19. The framework outlines how companies can transition to valuing talent as an asset rather than an as expense.
According to the WEF, 120 IBC members have shown strong support for the IBC metrics, with some expected to start incorporating them in their corporate reports immediately. At its meeting in January 2021, the IBC is scheduled to discuss a timeline for broader adoption.