Number-crunchers hope new benchmark will bring boards up to speed with ESG
It is rare to see the chief executives of the rival “Big Four” accounting firms on the same stage. In September, however, that occurred.
The reason? The World Economic Forum convened a meeting of the leaders during the UN General Assembly week, where they thrashed out a common accounting framework for environmental, social and corporate governance.
Sadly its name — stakeholder capitalism metrics — is unmemorable. It is also hard to summarise: there are 21 core metrics, or 34 supplemental ones, split into four buckets (prosperity, people, planet and governance).
The idea behind this initiative by the WEF International Business Council, is clear, however. For the first time, the Big Four will harness their collective muscle to create long-awaited consistency in how companies inform investors (and themselves) about their behaviour in relation to ESG norms.
While accountants are not usually seen as the source of ethical or environmental revolutions, the hope is that this move by the number-crunchers will create a ripple effect.
After all, the argument goes, if investors have common benchmarks with which to measure companies, they can pile pressure on boards to clean up their act. Groups will then pay attention to issues such as the environment that were once called “externalities” because they sat outside traditional economic models and accounting frameworks.
It will also allow employees and customers to rank companies more consistently and judge whether they want to protest about what is going on. Indeed, if the new metrics combine with rising digital transparency, these trends will subject companies to a new level of oversight.
This in turn could force the C-suite to uphold ESG values as much out of self-preservation (to avert investor, employee and consumer pressure) as anything else. Or to put it bluntly, what started with a dry accounting debate could end up in a place where even companies that adhere to Milton Friedman’s norms about the need to focus on shareholder returns feel unable to ignore ESG — because that will put shareholder returns at risk.
There are still hurdles to leap before that occurs (if indeed it ever does). The world of ESG accounting does not brim with harmony. Before the IBC launched these standards, other metrics included the Sustainability Accounting Standards Board, the Global Reporting Initiative and the Task Force on Climate-related Financial Disclosures.
Separately, Harvard Business School is developing a concept of “impact weighted accounting” and the European Commission is creating its own green taxonomy.
Optimists argue that this alphabet soup could and should be combined into one system. Pessimists warn that this has been impossible so far, in part because of the fear among activists that combining the measures will dilute the principles and make them meaningless.
There is also an ideological issue: whereas bureaucrats in Europe favour top-down, government-driven frameworks, Anglo-Saxon capitalists prefer bottom-up, industry-led solutions. The former camp insists that government standards are a better guard against industry capture and greenwashing; the latter say their approach is both more resilient and flexible since it can evolve organically.
Either way, it remains to be seen whether the two camps can be combined. Even if they can, it is unclear how quickly the industry can adopt them. Yet even as some critics fear that the new IBC framework will be too weak and broad-brush, not even the accountants who are creating the standards have the ability to comply yet.
More specifically, the accounting firms themselves only reported information on a third of the 21 metrics that they created a couple of years ago. They are now racing to provide reports on the rest, to be compliant for early next year, when the standards are supposed to be adopted.
If they need to reform their accounting systems to this degree to comply, it will be interesting to see how far other companies can follow, particularly at a time when Covid-19 has created such a drag on resources.
Nevertheless, and even allowing for these (big caveats), the direction of travel is clear: finally, more accounting firepower is emerging in the world of impact investing, ESG and sustainability.
Anyone who cares about these fields should give at least one and a half cheers. And then watch like a hawk to see what happens next.