Why we might never have a unified ESG reporting standard. And why that’s OK.

Here we go again! GRI and SASB announced a new collaboration effort in July 2020, following other attempts in 2017, 2018. The promise is always to consolidate, collaborate and harmonize in an effort to ease the reporting burden on companies. They haven’t succeeded yet, so I often get asked: Who is going to win the reporting race? Will be it SASB (Sustainability Accounting Standards Board) or will it be GRI (formerly the Global Reporting Initiative)? Will we ever get to a single ESG/sustainability reporting framework?

My answer: We might never have a single reporting framework, and that’s ok. Let me explain my thinking:

1. Each of the frameworks/standards have different things going for them. GRI Standards are still the most commonly used sustainability reporting framework at large publicly traded corporations. According to a KPMG survey, 75% of the G250 (half the Fortune 500) reported using GRI in 2017. Some of the more well known GRI reporters are: Unilever, BASF, Dow, CocaCola. With almost 40,000 GRI reports in the GRI database, GRI is deeply embedded in the corporate reporting space.

SASB, on the other hand, has the support of large institutional investors. In 2019, Larry Fink sent a letter to the CEOs of companies Blackrock owns saying that he wanted them to “disclose in line with industry-specific guidelines set out by the SASB and TCFD”. In 2020, Canada Pension Plan (CPP) published a new Policy on Sustainable Investing specifically outlining CPP’s support for companies aligning their reporting with the SASB standards. SASB has some serious momentum and it doesn’t seem that this will change any time soon.

2. If we learned anything from financial reporting, it’s that ultimate consolidation might not be possible. Companies started producing financial reports in the 1800s, and it wasn’t until 2003 that the International Financial Reporting Standards (IFRS) were issued. IFRS is the standard in more than 144 countries (source), including the European Union (EU) and many countries in Asia and South America. However, most companies in the US use Generally Accepted Accounting Principles (GAAP) instead, since that is the standard required by the Securities and Exchange Commission (SEC). So after more than a hundred years, we still have two financial reporting standards, not one.

And even when companies use one standard, there is not “one size fits all” solution. Although publicly traded companies in the US all must use GAAP, I have yet to open an annual report that does not have a section called “Non-GAAP measures”. This tells me that in order to tell their financial story, companies must use a combination of standard and non standardized measures. Perhaps we will arrive at the same conclusion for sustainability reporting?

3. Most companies are opting not to choose a single framework. A whopping 97% of S&P 500 reporting companies choose to combine frameworks instead of choosing one (Harvard Law). This is no surprise to me, given similar experiences with our clients. Using both frameworks can help companies hedge their bets, and also, as SASB CEO Janine Guillot argues, “when used in combination, SASB and GRI standards meet the needs of a broad range of users.” (Source)

4. GRI and SASB are different for a reason. The foundation of the collaboration efforts between GRI and SASB has been the notion that they serve different audiences and different purposes. One is designed to meet the need of investors, the other one is designed to meet the needs of a variety of stakeholders. One focuses on a subset of ESG issues that are financially material and the other one focuses on the impacts that the company has on society, the environment, and the economy. Note: If you want to learn more about the differences between the frameworks and when they are best applied, sign up for our new Reporting Frameworks Masterclass.

In my opinion, this isn’t a zero-sum or winner-take-all game. It is more complicated than that. Both frameworks have merit and, when used appropriately, are powerful tools for the development of trust through disclosure. I hear a lot of talk, both from companies and investors, that if we had a single reporting framework it would solve all the problems we have with ESG reporting. And there are days when I am tempted to fall for this panacea trap. At the end of the day, my advice is to focus less on the framework and more on the quality and consistent improvement of disclosure for your company, because that’s where the real wins happen. 

A note on TCFD: You might have noticed we did not mention the Task Force on Climate-related Financial Disclosures (TCFD). I don’t consider TCFD to be in the same “race” as GRI and SASB. But we’ll save that topic for another day.