The need for standards in non-financial reporting: an interview with Robert Eccles

Portrait Photo of Robert Eccles

When we think of reporting, we often think exclusively of financial information. Yet, a quiet revolution has been taking place in the industry, and it’s been brewing for some time now. Corporate leaders and investors alike are realising that they have an important responsibility to address issues like climate change. The challenge, however, is how to measure progress in this area and hold each other accountable. Without a set of standards for reporting, this is a nearly impossible task. We recently spoke with Prof. Robert Eccles, one of the world’s foremost experts in the field of sustainability and integrated reporting, to learn about the history of non-financial reporting and important developments in this space. 

Prof. Eccles, it’s great to speak with you today. Can you tell us a bit about yourself and your background to get started? 

Sure. I went to college at MIT and got degrees in math and history. I went on to get a PhD from Harvard in sociology and in time, became a tenured professor at Harvard Business School. I retired from Harvard and I’m now a Visiting Professor of Management Practice at the Saïd Business School at Oxford. My domain is basically sustainable investing and sustainability in companies. I look at the interface between companies and investors in the capital markets, with a focus on big enterprises. I was one of the founders of The International Integrated Reporting Council. I was the Founding Chairman of the San Francisco-based Sustainability Accounting Standards Board (known as SASB), which connects businesses and investors on the financial impact of sustainability. So, I’ve been involved in the development of non-financial reporting standards for about 30 years. 

In a recent article on Forbes, “Here is How to Set Global Standards for Nonfinancial Information,” you mention there is now a window of opportunity for big players in this space, like The Impact Management Project (IMP), the World Economic Forum’s International Business Council (IBC), SASB and the Global Reporting Initiative (GRI), to work together with government parties like the EU in the development of standards. Can you talk about the context here?

Yes, so the EU is currently revising its Non-financial Reporting Directive. This directive mandates that European companies have to report on sustainability on an annual basis, but it was pretty high level and didn’t outline what the standards were. They are reviewing that and looking to come up with more concrete standards for non-financial reporting, much like you have international financial reporting standards and Generally Accepted Accounting Principles (GAAP) in the U.S. Subsequently , the Amsterdam-based Global Reporting Initiative (GRI) and SASB announced that they would collaborate on a unified set of standards. The Impact Management Project (IMP) is doing wonderful work to help create these standards by working with GRI, SASB, the International integrated Reporting Council (IIRC), other non-financial standard-setting NGOs, financial accounting standard setters, and governments. So there really is a big opportunity to collaborate internationally on this if all of these initiatives come together. 

The two main organisations that are active in the non-financial reporting space are the Global Reporting Initiative (GRI) and SASB. You were SASB’s first chairman. Can you tell us a bit more about these organisations? 

Yeah. Both are non-profit NGOs. GRI started out in the late 90s - the founders are good friends of mine. Their core focus was stakeholders, not investors. They defined materiality as an externality. SASB came along about ten years later, in 2011, and took a very different position on materiality. They define materiality in the same way that financial accounting standard setters do—something that matters to investors. We realised that materiality differs by industry. For instance, carbon emissions are material for big manufacturing companies like Dow, and safety in clinical trials or access to medicine is important for pharmaceutical companies. SASB created an 11-sector classification system of 77 industries and came up with guidance on what the material issues are. These come down to 5 or 6 material factors, on average, for each industry. 

Early this year, BlackRock, the world’s largest asset manager, came out and said they wanted all their portfolio companies to report according to SASB and TCFD, the Task Force on Climate-related Financial Disclosures. GRI and SASB kind of butted heads for a number of years and there was a framing that was not exactly correct. People said, “Well, SASB is for the United States and GRI is for the rest of the world.” That’s not really true. Both organisations are striving for the same thing, just with a focus on different audiences, both of whom are important for sustainable development. That’s why their recently announced collaboration is so promising. 

I would like to go back to the concept of materiality and integrated reporting. You wrote an article on this topic earlier in 2020. Can you tell us a bit more about your experience with integrated reporting and why materiality is so important?

Ultimately, to advance in sustainability, what you need to get to is integrated reporting. I’ve been one of the people that’s been closely involved in promoting this. We never took a position on the standards. We never said “use GRI or SASB, or a combination.” But the gold standard is integrated reporting. Unfortunately, only a handful of companies and countries have made progress in this area. 

Last year, I published a comparative analysis on the state of integrated reporting around the world with two colleagues, Michael P. Krzus and Carlos Solano. We found that South Africa, the Netherlands, and Germany (in this order) were at the top in terms of high-quality disclosure. Integrated reporting is only mandated in South Africa, but the Netherlands is doing it pretty well too. The countries that are doing the worst in this area are Brazil, Japan. and the United States (dead last and by a lot). 

In terms of companies, Philips and SAP offer great examples of integrated reporting. This will probably shock you, but Philip Morris International (PMI), oddly enough, is another company that has one of the best integrated reports I’ve seen. There’s been a lot of talk in the media recently about their strategy to create a smoke-free future. I work closely with them and they published their first integrated report this year. They are a U.S. company and it is by far and away the best one I’ve seen in this country. PMI also published a bold “Statement of Purpose” signed by every member of their board of directors, which is where all of this has to start. I should also note that PMI is the only U.S. company to have done this. Not a single one of the 181 companies whose CEO signed their “Statement on the Purpose of a Corporation” has done so.

Now that you mentioned purpose, I’d like to turn to resource allocation decisions. Which factors should influence these? In other words, what should companies treat as material in your view? 

Well, until you have clarity from the board you can’t determine what’s material. Your stakeholders and timeframes determine what’s material from a reporting point of view. The Statement of Purpose idea was something I developed with Tim Youmans, Lead North America—Federated Hermes EOS, in my second book on Integrated Reporting. If you don’t care about other stakeholders and only care about short-term investors, then none of this ESG (Environmental, Social, and Governance) stuff matters. You can just have a token sustainability report and that’s it. If you really do have a view that the corporation exists to do more than make profit for shareholders and it should have a purpose, you need to have that declared by the board. Based on that, management figures out what the material issues are. Then, that gets integrated into strategy and capital allocation decisions. An integrated report becomes a discipline to make sure you’re making progress on your purpose and you can communicate that internally and externally. That’s what the ideal world looks like. 

Do you know of companies that are already combining good standards with a quantitative approach to ESG policy? For example, by using mathematical models to make sound decisions in this area? 

Well, to tell you the truth most companies still haven’t integrated material ESG issues into their strategy and resource allocation decisions. Before you get to that point, you need companies to care and to come up with standards and metrics. You have social and environmental issues, you come up with a way to measure them and you look at relationships between those and revenues and cost. Then, you can decide whether they are mutually enforcing or whether there are trade-offs. Most companies haven’t done that. So, mathematical modeling is way down the road. First, you need to have clarity on what the environmental and social issues are. You need to have clear impact measurement, data over a long enough period of time, and the discipline to posit what these relationships are. SAP is going in that direction with their connectivity diagram. But the mathematical model is 404 and most companies aren’t even at 101.

There seems to be a strong sense of urgency with climate change concerns on the rise. Late last year, you made the argument that Extinction Rebellion and investors should join forces. Can you elaborate more on this? 

Yeah, so that’s also an interesting question - how do you collaborate with movements? Extinction Rebellion is mainly focused on government policies. If you can get the investment community to have the same sense of urgency as these movements, and you could leverage that somehow to complement what governments are trying to do in terms of policy, that would be good. 

What’s holding companies back and what are the biggest challenges they experience with ESG reporting?

Companies complain that standards don’t apply to them and there is also a lack of political will. For a long time, people said “The market will sort it out,” and companies simply pushed back on government regulations. But the market did not give us financial reporting standards, a crisis did. You need to have political will supported by standards. Then it will be easier for companies to make progress in this area. 

What is the one policy you would advise governments to adopt?

To have standards for ESG information, just like financial information. If you don’t have good metrics and standards, how do you police them? There is a big window of opportunity open right now to measure progress, as I mentioned earlier. We need to take advantage of it. 

I’d like to wrap up by asking you: why is this topic so important for you personally? 

I’m a child of the ‘60s. I was an activist then. At that time, it was Vietnam. Now, I see myself as a capital markets activist (the ponytail is gone due to lack of hair and the beard has turned gray). How do you leverage the capital markets for sustainable development? How do you influence companies’ and investors’ resource allocation decisions? If we don’t do that, we won’t leave the world we want for our children and grandchildren. I see standards and integrated reporting as a point of leverage to achieve this, as well as government policies that support these. You can’t hold companies and investors accountable without these. That’s why I care about these things. They may be boring to most people, but I find them fascinating and fundamentally important.

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