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What the Finance function brings to the table is incredible amounts of experience aggregating data and building internal controls and governance around data in order to make sure that information that’s

reported externally and particularly if it’s going to influence investor decision-making, is of sufficient quality and reliability.

Myles Corson

Sustainability and Environmental, Social and Governance or ESG, have rapidly evolved from a topic that was relegated to a narrow set of stakeholders to become a priority for the C-suite and boards as investors bring increasing focus on the value of ESG data to their decision-making. However, the need for common reporting standards is acknowledged by regulators, investors and preparers who all see the benefit in reducing the complexity created by various frameworks from a multitude of ESG standards organizations. The latest EY Global Corporate Reporting Survey found that 74% of finance leaders and 89% of investors supported mandate reporting of ESG performance measures against a set of globally consistent standards.

As regulators look to bring greater rigor into ESG reporting their actions are set to reshape the future of reporting and impact companies everywhere. What is also becoming clear is the role finance functions are expected to play in the disclosure of nonfinancial information and the rigor in how it is prepared. In the same survey, 70% of the finance leaders polled that ESG reporting was a “significant” or “very significant” part of their role compared to 63% the year prior and 95% of finance leaders stated that finance teams have a role to play in ESG and nonfinancial reporting.

Picking up on previous episodes, today’s Better Finance podcast takes a deeper dive into the future of ESG reporting. I’m your host, Myles Corson, and I’m delighted to introduce a special episode featuring a recent conversation between Marc Siegel, the EY Americas Corporate and ESG Reporting Thought Leader and a board member of the Sustainability Accounting Standards Board, SASB, and Janine Guillot, the Chief Executive Officer of the Value Reporting Foundation, VRF. Their discussion took place a few weeks after the merger of the SASB, and the International Integrated Reporting Council, to become the Value Reporting Foundation.

As the CEO of the VRF, Janine is focused on advancing the progress towards a globally accepted, comprehensive corporate reporting system. This advancement took a big step forward in November 2021 with the announcement of the International Sustainability Standards Board, ISSB. The board has been formed to develop, in the public interest, a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs. This is a critical step toward the globally consistent sustainability reporting standards that the market has been calling for. Importantly, it was also announced that the VRF, including the SASB, as well as the Climate Disclosure Standards Board, would consolidate into the IFRS Foundation as part of this effort.

Recently, Janine was named Special Advisor to the ISSB Chair, Emmanuel Faber. In her new role, she will provide strategic advice and counsel to the Chair and its Trustees with specific responsibilities for the consolidation of the VRF into the IFRS Foundation and the establishment of the ISSB.

The consolidation effort is expected to be completed by June 2022 and represents the beginning of long-awaited convergence among standard setters that should make it easier for companies and investors to benchmark, more consistently, corporate progress on sustainability items.

While work towards this goal continues, sharing this discussion with Marc and Janine about the formation of the VRF will help our listeners further understand the importance of these consolidations and what it will mean to the future of ESG reporting.

This podcast episode is an abbreviated version of their discussion. If you are interested in the entire recording, we will post a link to the original interview on ey.com/betterfinance.

With that introduction, I’ll hand it over to Marc.

Marc Siegel

Hi, I’m Marc Siegel, the EY Americas Corporate and ESG Reporting Thought Leader.  We are very lucky today to be hosting Janine Guillot, who is the CEO of the Value Reporting Foundation.  From personal experience, Janine has been extremely influential in helping to shape the ESG ecosystem, and I’m really looking forward to hearing her insights on a ton of recent developments.

I should probably mention for full disclosure that the SASB is one of the organizations under the Value Reporting Foundation umbrella, and that I have been lucky enough to be appointed a SASB standards board member back in January 2019.  In case anyone isn’t aware; the SASB is a standard setting body that makes recommendations for voluntary ESG disclosures.

SASB is focused on an investor audience and therefore tries to identify ESG items that are more likely to be relevant to somebody allocating capital or deciding how to vote their proxy shares.  In order to find market evidence for those ESG items relevant to investors, SASB actually looks at ESG from an industry-specific lens, issuing 77 different industry standards.  That always made sense to me, since both companies and investors usually think about business issues with that industry lens.

Janine, obviously there’s so much going on around ESG on an almost daily basis — regulators, market participants, the UN, the IPCC and frankly all kinds of organizations around the world are all interested in recent developments.  So, I wanted to hit on several topics, but the first one is the merger of the Sustainability Accounting Standards Board, the SASB, and the International Integrated Reporting Council, or IIRC, and that merger was just finalized in June 2021.  Can you give us a sense of why go through all the difficulties and the pain and suffering, if you will, of actually undergoing a full merger between the IIRC and the SASB to form the Value Reporting Foundation?

Janine Guillot

So, to talk a little bit about the SASB and IIRC merger — and it was a lot of work;  I’ve learned that nonprofit mergers are as much as work as corporate mergers — we were really trying to be responsive to market demand, and we heard significant market demand from both the investor communities and the corporate reporter community for a more simplified, more streamlined corporate disclosure landscape, and we wanted to be responsive to that demand.

We felt very strongly that it would only happen through organizational consolidation.  So, through the years there have been many attempts at mapping frameworks, aligning frameworks, providing guidance on how to use frameworks together.  We really felt that the only thing that ultimately simplifies the landscape is organizational consolidation; and then the third thing is that we felt that if we merged the two organizations, we would have one stronger global player that could be more influential in driving the future of what the end state looks like.  So, those were all the reasons that we ultimately merged.

Siegel

What are some of the future plans now after the merger to help achieve those goals that you just mentioned?

Guillot

One thing that may be a little confusing to people and I want to make this clear, is that what the merger did is it created a combined governing body.  So, we have a single organization, the Value Reporting Foundation, that has a single governing board, that has a single strategy.

We do still have three what we call primary resources or tools, and those are the integrated thinking principles, which are really a tool for businesses for strategic planning; the integrated reporting framework; and the SASB standards.  And what we want to do is the integrated reporting framework and the SASB standards are both focused on external reporting, and we want to bring those two things together over time into a more coherent toolset for companies so preparers have something that feels easier to use than today where you have two separate tools.

Siegel

the IIRC and the integrated reporting framework I think is pretty complementary to the SASB more specific standards.  That could really help bring it to life.

Guillot

Yes, and in fact when we were talking about the merger, one of the rationales for the merger was the SASB standards were standards in need of a framework and the integrated reporting framework was a framework in need of standards.  The integrated reporting framework brings guidance around qualitative disclosure, around things like governance strategy, risk management, the SASB standards then bring detailed industry-specific metrics;  the combination of those two things gives investors a really comprehensive view of corporate strategy and corporate performance. 

Siegel

Let’s slip into another topic now around regulatory developments, and I guess we’ll talk about both the US and outside the US.  The SEC recently held a comment period for feedback around what they should do about ESG and sustainability disclosures, and the SASB put in a comment letter.  What were some of the recommendations that came out of that comment letter to the SEC?

Guillot

We made several recommendations.  One is, we made the clear point that climate risk is business risk, and climate risk is relevant to financial performance and financial risk.  And therefore, it is within the purview of the SEC to require disclosure around climate risk, and we made that very clear.

We then talked about industry-specific guidance and that we do think as a general rule — and this is not just true for climate, it’s true for all ESG disclosure; different issues affect different industries to different magnitudes and so as a general rule, we think that industry-specific disclosure is important.  And we also really emphasize the value of standards.  SASB particularly was founded based on an analogy to financial accounting standards and a belief that standards are the most powerful tool to get consistent, comparable, reliable disclosure into the hands of investors.  So, we made a very strong case that we thought the end solution for ESG disclosure needs to be the use of a standard setter similar to the FASB or the IASB.

Climate risk is financial risk; industry-specific disclosures are important; we actually think that at the end of the day, the SEC will need to deal with the question of comprehensive ESG disclosure, not only climate disclosure, and we think a standard-setting solution is needed for comprehensive ESG disclosure.

Siegel

The SEC is not the only player; Europe — not even the securities regulator, but the European Union — recently published the CSRD (The Corporate Sustainability Reporting Directive); how do you see that interacting with the whole capital markets landscape, particularly even in the US?

Guillot

What’s important about the CSRD, which as you said is the Corporate Sustainability Reporting Directive, what’s important is to understand is the CSRD is only one piece of a fairly comprehensive set of legislative initiatives.  So, there’s also something called the SFDR (Sustainable Finance Disclosure Regulation), there’s also something called the European Union Taxonomy on Sustainable Finance, and so there are actually several pieces and it’s important I think for people to understand all of those.

Some of them are targeted primarily at investors and financial market participants governing disclosure of investment product and investment funds, and then some of them are targeted at corporates.  But they’re interrelated, because if you’re going to require in regulation certain disclosures by investment managers and investment funds, then those investors need that information from their portfolio companies.  all of these pieces are interrelated, and the conversations about the CSRD in Europe are definitely acknowledging that interrelationship.  part of the CSRD discussions are, how do you also sync that up with the disclosure requirements of investors in the SFDR?  So, I just probably overwhelmed everyone with acronyms (Laughter), but it's important to understand it’s a broader landscape.                                                      

But if we then go directly to the corporate disclosure landscape, Europe has come out with an intent to develop European standards that would be applicable to companies.  They have tasked FRAG, which is Financial Reporting Advisory Group, with developing those standards.  That work is underway right now, and you hear very strong demand from global companies and global investors for some sort of international harmonization around standards.                                                      

The big open question right now is, what is the mechanism to make that happen if the European commission and the US SEC move forward on different paths?  So, there’s a lot going on in this space right now, as you can see.

Siegel

So, the activity in Europe — whether it’s the CSRD, which could directly impact companies in their own reporting, or whether it’s the SFDR, which impacts investors but then indirectly impacts their investees or the same US preparers — keep an eye on what’s going on across the Atlantic, because it could be impacting you directly or indirectly.

Guillot

Yes, and we’ve really been trying to educate US companies about that too.  I think US investors understand this dynamic very well, because they’ve already been directly impacted by SFDR.  Companies have not yet been, so that indirect route is not clearly understood yet.

Siegel

Yes, and that actually goes to the next topic I wanted to talk about, which is — we’re going to use the word materiality, but we’re going to use it loosely, because I know that many of my clients have a specific thought in mind when they think about materiality and that’s the SEC and the legal definition in the US, but materiality in the ESG world has been used differently.

When we talk about materiality, it often is a topic of confusion.  There’s a number of different definitions.  How would you describe the meaning of materiality and how different it is between the EU’s double materiality concept and then say the SASB’s single materiality, just as an example?

Guillot

Let me kind of take a step back in answering that, Marc.  Because I think one of the most important things, particularly for people who come from a financial reporting background, and I grew up in a financial reporting background — for people who grew up in a financial reporting background, the whole purpose of corporate reporting is typically disclosure to investors and other providers of capital.  That’s your frame of reference, because you are producing financial statements that are then used, governed by capital markets regulators and provide information to investors and providers of capital.  It’s important to remember: that is not the roots of corporate sustainability reporting.

Corporate sustainability reporting typically has a much broader purpose, which is communications to multiple stakeholders; that’s to customers, to employees, to civil society and NGOs, to investors, and especially in the early days, to people who would be characterized as socially responsible investors.  Corporate sustainability reporting really grew up to meet a very different set of needs.  And then the investors — let’s call them the mainstream financial investors — they’re newer to this conversation in using this sustainability information and integrating it into investment decision-making.

That’s one reason this whole materiality conversation got so confused, is because corporate sustainability reporting grew up with a definition of materiality which is around a company’s impacts on stakeholders and those stakeholders are the target of corporate sustainability reporting.  And then meanwhile, as you know, the financial markets have this whole concept of materiality which is around impact on financial performance and the value of a company.

So, that’s just important background for people to understand, because I have literally been in conversations where there has been a CFO and a Chief Sustainability Officer, and they are both using the word materiality and they don’t know that they are using that word very differently.  And that’s part of what has confused this conversation.

The EU’s double materiality concept has actually been helpful, because it has shed light on the fact that different people use this term differently and has really illustrated there are two concepts.  There is the concept of how [so] sustainability issues impact financial performance and enterprise value.  That’s the way that SASB applies that concept, that is generally consistent with disclosure obligations of many companies under securities law.  And then there is the concept of what some people would call impact materiality or environmental and social materiality, and that is the concept of how do a company’s actions impact society, and that concept is relevant for disclosure to multiple stakeholders.                                                      

Now those two things intersect, that’s really important.  They’re not independent things; there is an intersection, and really what the SASB standards do is they identify what are the sustainability impacts that are most likely to impact financial performance and enterprise value.  So, I don’t know if that helps, Marc, but that’s a little bit of context about this materiality conversation.

Siegel

 Two dimensions that people should think about when they hear the word materiality and the next two questions should be, are you talking about materiality to whom?  Right so which stakeholder group are you talking about?  The investor stakeholder group?  Or investors plus the rest of the different stakeholders that you mentioned?  So, figuring out which stakeholder group you’re talking about is going to be really helpful in deciphering which definition.

And then the second piece that you brought up is once you have the different definition it helps you understand which issues might be material.  Things that are going to be for the investor audience, impacts on the company and their ability to create value — so inward — versus for the broader stakeholder group it’s impacts outward, impacts of the company on the environment, on society, etc.  So, those two dimensions I find to be useful, and what I heard you say and picking out those two dimensions of which audience you’re talking about?  And whether you’re talking about inward or outward?

Guillot

It’s super important.  Essential to standard-setting is an understanding of your target audience and their use case so that you can ensure that the standards will provide relevant and decision useful information.

When we often hear people say — well, can we just get to one global standard, to try to say you’re going to get to one global standard that meets the decision usefulness or criteria for an investor and an NGO and an employee and a policymaker, that’s just not a realistic expectation for a standard-setting process because standard-setting has to be grounded in the user and the use case and I don’t know if you agree with that, Marc, based on your experience, but that’s definitely our view at the Value Reporting Foundation.

Siegel

I totally agree that when you’re talking about different audiences and different groups, it’s very hard to get to a single answer.  This drives the next conversation you brought out is that this is not binary; this is not one or the other in terms of the user groups.  Can you talk a little bit about the building block approach to how the system might evolve to try to tackle that very problem?

Guillot

We talk a lot about the building block approach; we talk about it in, I think, all three of our major consultation responses, which were to the EU, the IFRS Foundation and the US SEC; and it’s particularly the SASB standards were rooted in providing information to investors and providers of capital.  And investors and providers of capital are global; they invest globally.  So, whether a portfolio manager is sitting in Frankfurt or Tokyo or New York, many of those portfolio managers will be running global portfolios and looking to allocate capital around the world.

We have a long-standing view that for the target user of investors and providers of capital, there needs to be some foundational level of global standards.  And then those foundational level of global standards, we believe, should exist under the IFRS Foundation.  Because there’s no other place; if you look at the global capital markets infrastructure, the IFRS Foundation is really the only place you can lodge those kinds of global standards.

But we have to acknowledge that sustainability disclosure does have a much broader use case than just providers of capital, and in many jurisdictions, especially in the EU, sustainability disclosure is explicitly linked to the achievement of certain public policy goals.  We have to acknowledge that different regions or different countries will have different public policy goals, and those will have disclosure needs, and so we see a foundational building block, which is global standards for the capital markets and then additional building blocks that can be used in other markets as needed for their public policy goals.  That’s the building block approach  that foundational building block is oriented around impact — what we might call financial materiality or enterprise value materiality — and the additional building blocks can be building out the stakeholder impact view.

Siegel

So, that first foundational building block of things that are probably relevant to capital market participants for their decision-making process; whether it’s buy, sell or hold shares or voting the proxies, that is the first building block.  And I want to mention this in a second, we’ll get to the IFRS Foundation might be uniquely positioned to help set the standards in that building block.  But then in different jurisdictions, there might be other items that need to be layered in on top of it because of their unique jurisdictional prioritizations among the different stakeholders.

Guillot

it’s both in terms of their jurisdictional priorities and the other big issue is the legal framework in which they’re operating, because there are very different frameworks governing corporate disclosure in different countries around the world.  And the European Commission actually has a fairly broad mandate around corporate disclosure requirements that is broader than some other jurisdictions that may be more oriented around solely an investor protection mandate.  So, the legal construct in which people are operating is also a very significant driver here.

Siegel

We made it a few minutes without mentioning the legal construct, but you’re absolutely right.  That always is an important thing to think about, especially in this country but obviously in other places, too.  So, let’s get back to that first foundational building block; you alluded to the IFRS Foundation.  For those who aren’t as familiar can you give a little background on what’s happening with the IFRS Foundation and how the Value Reporting Foundation is trying to help?

Guillot

The IFRS Foundation last year issued a consultation on whether they should establish an international sustainability standards board.  They are very clear that they only want to do that if it’s demand-driven, meaning do they hear significant support from the investor community, the corporate community and the regulators, and particularly the securities regulators have a very important role vis-à-vis IFRS.  So, they only want to move forward if they see strong demand.                                                      

They issued that consultation last year, and the response was quite strong demand.  We analyzed the responses to the consultation, and there was particularly strong demand from the investor community and the regulatory community.  So, they are now moving forward in the next step, which is making the final decision about whether they will form the ISSB.                      

We are participating in the technical readiness working group, which is providing technical advice about what the ISSB standards could look like, so what is the architecture of the standards.  Also developing a prototype climate standard, which pulls together guidance from a lot of existing organizations into one concise document that could be a basis for an ISSB standard and then all of this is coming together with a goal of the trustees making a final decision.

Siegel

People will want to be watching what the US SEC does.  They are likely to issue some kind of proposals around, potentially, climate change disclosures and potentially even human capital disclosures, and as you just mentioned Janine, the IFRS Foundation likely to make some kind of decision if they’re going to launch a new sustainability standards board.

Guillot

I do hear a lot of people in the US who assume that the IFRS/ISSB effort would have no relevance in the US, and it’s just because it’s the mental model — IFRS isn’t applicable in the US today.  I do think given that the global investor community has fairly strong support for the IFRS effort that US companies should assume that there will be strong investor demand for them to report to the new ISSB standards, and that the ISSB standards, if this is done right, will become the global best practice.  it’s very important for US companies to be following that IFRS effort.  Don’t ignore it.

Siegel

So, that’s a great point. we see lots of US companies adopting TCFD and SASB as a leading indicator of what investors might be interested in.  That could change over time if the ISSB does their work in a way that is just as useful for investors; the demand might shift to what they’re doing.  So, very important to engage on what the ISSB might do, should they come to fruition this fall at some point.

Guillot

Correct.  And probably in analyzing all the consultation responses that the IFRS got, the strongest message they received from investors was, leverage TCFD and SASB.  That was consistent feedback to the IFRS trustees.

Siegel

We both started off in the financial reporting community, and have sort of come to sustainability reporting at different points in our career.  But do you have a view as to what role the Finance function at a company should play around ESG reporting?

Guillot

I think what the Finance function brings to the table is incredible amounts of experience aggregating data and building internal controls and governance around data in order to make sure that information that’s reported externally and particularly if it’s going to be used by investors and influence investor decision-making, that that data is of sufficient quality and reliability to be relied on.

Then equally important is the connection of that information to business strategy and financial performance.  So that’s what investors really want to hear.  They don’t just want a set of quality KPIs.  They do want that, but they want to understand how those KPIs are relevant to business strategy and business performance.  The planning side, the management reporting side, the strategic side of most Finance functions are really well-placed to do that.  it’s both the quality and reliability of the data and the governance of the data, and then the connection of that data to business strategy risk management, business performance.

Siegel

I couldn’t agree with you more.  It’s such a cross-functional effort when it’s done well that the Finance function as well as the Risk function and the sustainability group at HR and IR and Comms all really have a role to play in this.  So, I think that that’s great.

Janine, thanks so much for taking the time to talk with me and cut through a lot of the noise and get at some of these issues that matter most.  This was a great conversation, and I know you provided a lot of food for thought for everyone who was thinking about ESG these days, and that population seems to be growing.

Corson

2022 promises to bring significant changes to ESG reporting and both Marc and Janine provided great insights into what we can expect in the upcoming months. I am grateful to them for allowing us to share their conversation with you.

If you’ve enjoyed this or any episode, please remember to subscribe to the series, or leave a rating or review. And if you’d like to find out more about the topic, we’ll post related links at ey.com/betterfinance.

as always, thanks for listening and your continued support. I look forward to speaking with you on the next episode of the Better Finance Podcast, a series that explores the changing dynamics of the business world, and what it means for the finance leaders of today and tomorrow.

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