Home INNOVATION Business Model The Fungibility of Environmental, Social, and Governance Reporting

The Fungibility of Environmental, Social, and Governance Reporting

April 12, 2024

For all organisations, there is the need for ESG reporting to be interoperable because it impacts the ability of organisations to streamline their reporting processes and communicate what is being done to their stakeholders, effectively.

In October 2023, the EU defeated an attempt by some of its Members of the European Parliament (MEPs) to water down the requirements regarding its European Sustainability Reporting Standards (ESRS), thereby ensuring that, through the incorporation of double materiality, it would achieve its ultimate goal of giving non-financial and financial reporting total parity. Following this news, the Global Reporting Initiative (GRI) claimed that “a high level of interoperability between the new ESRS and the GRI Standards – already widely used by thousands of organizations in Europe and around the world – [had] been achieved.”¹ Although the GRI acknowledged that ESRS is mandatory and the GRI voluntary, their claim nevertheless called attention to the issue of fungibility, implying that the GRI stood alone in providing organisations with a truly global reporting standard. Our view is that the issue of fungibility is more complex and nuanced than that, while appreciating the value that the GRI brings to the table.

Increasingly, standards set by the largest trade and political blocks such as the EU have a degree of extra-territoriality. In the case of the EU, this means some laws apply in specific contexts beyond the jurisdiction of member states. This will be the case with the new ESG reporting standards. ESRS, for example, will apply to all non–EU companies that were previously in the scope of the Non-Financial Reporting Directive (NFRD), which was the predecessor to the CSRD. As the London Stock Exchange has noted, this includes Companies with securities, such as stocks or bonds, listed on a regulated market in the EU; Companies with annual EU revenues exceeding €150 million and an EU branch with net revenue of more than €40 million; and Companies with annual EU revenues exceeding €150 million and an EU subsidiary that is a large company, defined as meeting at least two of the following three criteria: more than 250 EU-based employees, a balance sheet above €20 million or local revenue of more than €40 million.²

We should not expect comparable reporting across the globe to be achieved by asking the same questions and scoring the answers against a common set of exemplars.

Even within member states of the EU, there is cultural and legal diversity. Across the world there could be orders of magnitude more difference and complexity. How large organisations address these differences in their supply chains and international subsidiaries will have significant implications for their own reporting and for the success of ESRS itself. We should not expect comparable reporting across the globe to be achieved by asking the same questions and scoring the answers against a common set of exemplars. Instead, we should encourage reporting organisations to interpret the quantitative data through a qualitative lens that acknowledges cultural, political, and geographical differences. Metrics that in western Europe, for instance, could be seen as poor or failing could be evidence of succeeding and progressing in another part of the world.

The professional judgment of auditors may well prove sufficient to map the differences in data and interpretation across the developed world in much the same way that judging materiality in financial reporting allows for qualitative analysis alongside the strictly quantitative assessment of accounts. However it is done, we should not expect specific data points plotted on a common scale to sufficiently describe compliance to ESRS. We must allow room for a four-dimensional analysis; the landscape that surrounds the data now, in the past, and in the future. Progress from a low base is still progress, especially if it is achieved in adversity.

Nothing in this approach should be taken as excusing the inexcusable: modern slavery is abhorrent wherever it is found; corruption is pernicious in any circumstances. Instead it is about finding meaningful contexts with which to draw a moral equivalence.

A thought experiment should illustrate that point. Let us consider a fashion brand with a European head office and distribution, and outsourced manufacturing across the globe. One such factory is in Bangladesh. The enterprise has publicly stated a commitment that no employee will be paid less than the living wage. The living wage for the most junior staff in the distribution hub in rural Netherlands is €20,700pa³, the living wage for a Bangladeshi textile worker in urban Dhaka is €2,565pa⁴. The enterprise can audit both sites and establish if the living wage is being paid. However, the living wage in the Netherlands is lower than the legal minimum wage of €23,940pa⁵. No one should be receiving less in the Netherlands. While the minimum wage in Bangladesh is €1,258.50pa⁶, almost half that of the living wage in Dhaka. Is it enough that Dhaka workers are paid roughly a tenth of the income of workers in the Netherlands? Are the Netherlands workers simply lucky that the statutory wage limit is set higher than the living wage? Or is the enterprise obligated to uprate the Bangladeshi incomes by a similar proportion?

Nothing in this approach should be taken as excusing the inexcusable: modern slavery is abhorrent wherever it is found; corruption is pernicious in any circumstances.

Other examples can be found throughout the scope of the standard, such as power generation. While many of the countries most dependent on coal-fired power have plans to phase down coal, if not to phase it out altogether, many are still bringing new coal-fired power stations online. It is estimated that somewhere between 170 GW and 270 GW of capacity will be built in upcoming years⁷, making many countries´ phase down plans look ambitious and pushing eventual phase out further into the future. Enterprises select international locations and venture partnerships for compelling business reasons outside of power generation but will now have to think of its consequences within the supply chain and what mitigation measures could be meaningful.

It is questions like these that enterprises must grapple with in addressing the requirements of ESRS reporting. It is not just data, but what the data means and what it says about the enterprise, its values and its impact on society and the environment.

Go to top

About the Authors

Tim Bovy has over 35 years of experience in designing and implementing various types of information and risk management systems for major law firms such as Clifford Chance; and for international accountancy firms such as Deloitte. He has also developed solutions for organisations such as BT, Imperial Tobacco, Rio Tinto, the Kuwaiti government, The Royal Household, and the US House of Representatives. Tim is an elected member of The Royal Institute of International Affairs, Chatham House, an Independent Think Tank based in Central London, and holds a BA degree, magna cum laude, from the University of Notre Dame, and MA and C.Phil degrees from the University of California, Davis.

Ian Hodges has worked in a variety of information management roles over a twenty-year career. He has designed and implemented records and information management systems at a national scale, developing parts of the digital archive at The National Archives (UK). At a corporate level he’s undertaken information management projects with The Royal Household and Her Majesty’s Treasury. Ian also has information rights expertise developing policies and procedures for Freedom of Information and Data Protection compliance and working as a Data Protection Officer. In addition to CISM, CIPP/E and CIPM certifications, Ian holds a BA degree from the University of Southern Queensland, a postgraduate diploma from Deakin University, Melbourne and an MA from Birkbeck, University of London.