Newly merged Value Reporting Foundation moves forward on standards
The Value Reporting Foundation, formed by last month’s merger of the Sustainability Accounting Standards Board with the International Integrated Reporting Council, is advancing development of environmental, social and governance standards as financial regulators press for improved ESG reporting.
The SASB Standards Board held its first public meeting Thursday under the new structure to update members on progress on the latest projects, including content governance, human capital, plastic risks and renewable energy. They also discussed how the new structure for the organization is working, along with the move by the International Financial Reporting Foundation to set up an International Sustainability Standards Board, where the VRF will be participating as part of a Technical Readiness Working Group.
The group is trying to fit together SASB’s standards, the IIRC’s Integrated Reporting Framework and a broad set of Integrated Thinking Principles on which they agree.
“We’re very excited about the merger,” said SASB Standards Board chair Jeff Hales during an online press conference following the virtual meeting. “From an operational perspective, things are going well. We’re working to have both of these organizations come together in one organization. I think of us less as reconciling the different products that were being produced by the two organizations. I’d rather think about it as helping the market to more efficiently use the three sets of tools, which are Integrated Thinking Principles, the Integrated Reporting Framework for reporting on how the six capitals come together for enterprise value creation, and using SASB standards to promote comparable disclosure related to those business activities.”
He sees the Integrated Thinking Principles as part of integrated reporting more generally, but also as helping companies with their decision making. “Integrated thinking has always been part of what the IIRC has thought about, but one of the things we would like to do as part of the Value Reporting Foundation is further develop the Integrated Thinking Principles to help companies make the right decisions, in addition to also reporting externally to shareholders and other capital providers,” he said.
The VRF will be working with the emerging International Sustainability Standards Board that the IFRS Foundation will be overseeing alongside the International Accounting Standards Board. “The IFRS Foundation is considering the establishment of an International Sustainability Standards Board, and part of what they want before making a final decision and announcing it is to do all the due diligence that you would expect them to do, including trying to help the future board get a running start at that work,” said Hales. “One part of that is the Technical Readiness Working Group. The Value Reporting Foundation is helping with that work stream. That includes some preliminary work on developing a climate-related financial disclosure standard, trying to respond to the market’s call for climate first, but also sustainability issues beyond just climate, so there’s additional work there. There are conceptual guidelines, for example, trying to help that new board so they don’t have to start from scratch. It’s everybody’s hope that they can more easily build on work that’s already been produced. A lot of the feedback that the IFRS Foundation has already gotten is that, if the IFRS Foundation is going to do this, they do it in a way that promotes progress that the marketplace has already been delivering on and not slow that down at all. Our involvement in the technical working group is a positive sign that the IFRS Foundation understands the importance of building on that existing work.”
One of the projects that the Value Reporting Foundation is undertaking involves renewable energy in the electric utility industry. “It is something that we’ve looked at before,” said Hales. “In this particular industry, previously we already identified gas emissions and energy resources planning as an important topic for energy producers, and as part of that, we identified the importance of talking about what long-term strategies are for these companies and their plan to manage emissions and to hit emissions reduction targets, etc. We also had a focus on renewable portfolio standards, so we’re thinking about what the policy incentives are and requirements in place for energy producers to provide a minimum level of renewable energy as part of the energy they are delivering. We had identified that, as that’s indicative of the importance of the topic broadly, but we’ve gotten market feedback, and what we heard back is that renewable portfolio standards are one policy mechanism, but they’re not the only one. We think can come up with a better solution that will more effectively meet market needs by more broadly touching upon how companies can manage a transition to a low-carbon economy through their focus on renewable energy and do it in a way that is going to better fit the needs of energy producers around the world in different regions where there might be different policy incentives in place.”
“It’s really important as we move through the process of executing the project to really engage with the market, to really understand the issue, to be transparent around the decision making,” said Bryan Esterly, director of research at SASB. “It’s a lot different than maybe other types of projects that other organizations can lead when we’re doing standard setting because we really want to be transparent, which is one of the reasons why the meetings are public. We do a number of things when executing projects to help educate stakeholders, companies and investors impacted by any updates. It’s really important when we get to the outcome of updating the standard to have some good buy-in and have the market feel like it’s a good process that was followed.”
Other projects under discussion at the meeting included content moderation in the internet media and services industry, including how companies manage harmful online content and rank and recommend online content. This is a politically thorny area for some of the technology giants who have come under pressure from both sides to either clamp down on social media discussions of sensitive topics or to open up their platforms more to uncensored discussions. Other parts of the project include controversial areas such as data privacy, the use and collection of sensitive user data, and freedom of expression. Not surprisingly, SASB has not heard much from some technology companies from which it sought feedback during the current consultation period, but it’s still in the early stages of the project. The plan is to develop an exposure draft in the third quarter and open it for a 90-day public comment period in the fourth quarter. Hales hopes that having an actual exposure draft for companies to look at will prompt the big tech companies to offer more feedback.
Other projects under discussion include human capital, especially as it relates to diversity and inclusion, and plastic risks and opportunities in pulp and paper products and chemical industries, especially the management of single-use plastics and bio-alternatives. The human capital project comes in response to increasing investor demand for information about diversity efforts at companies, the lack of consistent disclosure guidance, which leads to sporadic reporting and inconsistent and incomparable data about areas such as workforce composition, turnover, costs, diversity and demographics. The board is trying to decide whether to pursue an industry-specific or industry-agnostic approach, and which industries should be included.
Meanwhile, SASB and the IIRC under the new Value Reporting Foundation are seeing demands by the Securities and Exchange Commission and the European Union for better disclosure of climate risks at companies, which may perhaps lead to further use of their standards, principles and framework in the U.S. and Europe.
“It’s sort of an open question whenever a legislator or regulator makes a decision to mandate something, either by law or through market regulation, what it will actually mean for a private standard-setter like SASB or some other organization,” said Hales. “It really does depend on the way in which it’s done. They could move forward in a way where they could have essentially pointed to the work of a private standard-setter, and there is a lot of appeal for that sometimes when a particular region doesn’t have the capacity or the resources to feel like they can fully invest in that themselves, so they may point to others to manage that process. They could do it in a way that layers on. This is something that you’ll see SASB continuing to engage with the EU and the SEC about what we think is best practice for both of those regions, but essentially we’re supportive of a building blocks approach. We feel like meeting the market needs for the sustainability issues that are most likely to be financially material for different companies is a great way to provide a base layer of disclosure, and we recognize that each region could potentially have different needs that go beyond that. So our hope is that those initiatives would use a building blocks approach, because you could certainly imagine that what they would do would be more directly at odds with the work that is being done to try to meet the market needs through a private sector standard-setting approach. Then there would be more of a question as to whether that regulatory or legislative initiative would build upon the existing work or create a stumbling block. So we’re hopeful that it’s building blocks and stepping stones rather than stumbling blocks. We’ll see what happens.”