Who cares about corporate greenwashing? How sustainability reporting is changing 

By Professor Carol Adams, August 2022

Professor Carol Adams shares recent developments in sustainability reporting and just how much is at stake. 

Initially, there was just one key player setting sustainability reporting standards and frameworks to hold organisations accountable for their impact on economies, society and the environment: the Global Reporting Initiative (GRI). The GRI Standards are concerned with reporting to a broad range of stakeholders, including investors. Other bodies were established to address the implications of sustainable development megatrends (particularly climate change) on companies. In 2022, these newer organisations, focused on ‘enterprise value’, have been absorbed by the International Financial Reporting Standards (IFRS) Foundation and an International Sustainability Standards Board (ISSB, now comprising six people) established to sit alongside the International Accounting Standards Board (IASB).  

Accounting academics researching accountability for sustainability have been critical of these developments for a number of reasons: their proposed focus solely on the enterprise value of sustainability trends; a so-called ‘investor perspective’ that doesn’t take as a starting point the impacts of organisations on sustainable development; the implications for ‘greenwashing’ and strategy in relation to sustainable development; and a lack of collaboration with the GRI. 

However, on 24 March 2022, the IFRS Foundation and the GRI announced an agreement to coordinate their standard-setting activities and align terminology and guidance. The unworkable notion of dynamic materiality, concocted to show the relevance of bodies existing at the time, has disappeared. Instead, they favour the ‘two pillars’ that GRI CEO, Eelco van der Enden, has been speaking about.  

The IFRS Foundation/GRI agreement is quite remarkable given previous positions. While the GRI has supported the consideration of financial statement implications of sustainability matters from the outset, 18 months ago the IFRS Foundation Trustees put out a consultation paper that was dismissive of GRI. 

What’s happened since? 

A few days after the agreement was announced, the ISSB released its first exposure drafts: S1 on 'General Requirements for Disclosure of Sustainability-related Financial Information'; and S2 on Climate-related Disclosures. The reference to ‘financial’ disclosures in the latter, largely adapted from the Taskforce for Climate-related Financial Disclosure’s recommendations, has been dropped. The general disclosure standard requires judging what is material is from an enterprise value perspective, providing ample opportunity for increased greenwashing. The promised connection of either exposure draft with the financial statements is elusive.  

Who stands to gain? 

• The ISSB stands to gain credibility in sustainability that it’s not yet earned and will not earn through an investor focus alone. 
• By aligning with the GRI it stands to benefit from their experience and multi-stakeholder approach to identifying issues. 
• The GRI might gain more funding, for example from national governments and stock exchanges seeking to mandate a double materiality approach.
• Investors will benefit from continued GRI reporting on the impacts of companies on sustainable development (which affects long term returns).
• Reporters will more easily align with both sets of standards and the EU Corporate Sustainability Reporting Directive (CSRD). 
• Mandating of GRI reporting alongside ISSB reporting will reduce greenwashing and increase accountability. 
• All will benefit from the disappearance of ‘dynamic’ materiality and the so-called WEF (World Economic Foundation) indicators. These are effectively a subset of GRI indicators selected to reduce the burden of impact accountability on businesses.

Dynamic materiality refers to the progression of issues that impact the economy, environment and people to those that also affect enterprise value. A standard-setter focusing only on the latter would be taking a back-to-front approach and inviting greenwash: if you don’t prioritise looking at the impacts of an organisation on sustainable development and its megatrends, you can’t pick up what’s relevant to investors. 

Where to now? 

Several accounting, investor and other capital market players have called for a two pillar or double materiality approach (e.g. the United Nation’s PRI and the Institute of Chartered Accountants of Scotland). 

Others have agreed with whatever the IFRS Foundation has proposed, perhaps assuming that it would make their lives easier or give them more control. Time will tell how many stakeholders will support this cooperation agreement. For example, will the International Public Sector Accounting Standards Board (IPSASB), which has committed to work closely with the ISSB, also now work with GRI and its Global Sustainability Standards Board (GSSB)? The latter seems a more obvious fit for the public sector with its broad range of stakeholders and the imperative of considering its impacts on sustainable development. 

With additional funds, GRI would be able to do more — including better connecting its standards to the achievement of sustainable development and speeding up the development of sector standards, such as a much-needed public sector standard. 

The ISSB must differentiate its work programme from what has been the purview of the GSSB. There’s much to do in developing approaches to disclosing the financial statement implications of sustainable development risks and opportunities. This is important to investors. 

Two pillars require a bridge. Contenders are an updated Management Commentary Practice Statement incorporating multiple capitals and the Sustainable Development Goal Disclosure Recommendations. The Management Commentary Practice Statement is guidance on narrative reporting published by the IASB. But its conceptual framing doesn’t fit the purpose of reporting to a broad range of stakeholders, nor on impacts of the reporting organisation on economies, the environment and society. A conceptually appropriate bridge could be co-created by the GSSB, IASB and ISSB. 

With respect to the three scenarios I set out in October 2021 (IMPACT magazine issue 10 — Sustainability and Society): the disastrous scenario A has been avoided and we’re on the way to achieving somewhere between preferred scenarios B and C. Staying on that path, arguing for both sets of standards to be mandated and maintaining a focus on the SDGs as our north star will require continued leadership of the sort demonstrated in forging the cooperation agreement. Much is at stake.  

More information on Professor Adams' research interests.