In a move that will help solidify a global system of ESG reporting standards, the Sustainability Accounting Standards Board and the International Integrated Reporting Council will merge to create the Value Reporting Foundation.
The merger helps progress the vision of a single, coherent system of corporate disclosure, an essential ingredient for investors and corporates serious about ESG reporting.
Chair of SASB, Robert K Steel, said the merger was an important step in enabling investors to communicate with clarity and ease about the issues that matter most to financial performance. Importantly it helps to eliminate the fragmented reporting landscape that currently exists in ESG.
The merged entity – which will be headed by the current CEO of SASB, Janine Guillot – will maintain the Integrated Reporting Framework, advocate integrated thinking, and set sustainability disclosure standards for enterprise value creation. The organisations said that the merger directly responds to calls from global investors and corporates to simplify the corporate reporting landscape, providing the market with a clear solution for communicating about the drivers of enterprise value.
The Value Reporting Foundation could eventually integrate other entities focused on enterprise value creation, and the Foundation and Climate Disclosure Standards Board have jointly signalled interest in entering into exploratory discussions in the coming months.
“Sustainability disclosure is at the top of the agenda for many, creating incredible momentum towards simplifying the corporate reporting landscape. By merging two organizations focused on enterprise value creation, we hope to clarify the field. We stand ready to engage with the efforts of the IFRS Foundation, IOSCO, EFRAG, and others working towards global alignment on a corporate reporting system,” says Guillot.
The merger will advance the work of CDP, CDSB, GRI, IIRC and SASB in the Statement of Intent To Work Together Towards Comprehensive Corporate Reporting, which outlines a vision for a comprehensive corporate reporting system.
Listen to Janine Guillot in conversation with Amanda White
In this Fiduciary Investors Series podcast Amanda White talks to chief executive of the Sustainability Accounting Standards Board, Janine Guillot, about stakeholder capitalism and the role investors can play in shifting the dial. We discuss the value SASB can play as a tool for decision making and how stakeholder issues can impact performance. SASB standards identify the issues most likely to impact financial performance in 77 industries.
Guillot says the key lever to help re-establish trust between business and society is that companies measure, manage, and reward environmental and social issues the same way they measure, manage, disclosure and reward on financial issues.
New Zealand Super has completed the latest five-year review of its reference portfolio, with currency risk hedging a hotly debated topic by the internal investment committee.
The NZ$50 billion fund eventually decided to leave its reference portfolio fully hedged, but the discussion went to the board which is an unusual situation for the fund.
“We had a lot of discussion around currency. In New Zealand there has been a benefit to hedging and there has been a currency hedging premium for a long time,” Stephen Gilmore, chief investment officer of fund, said. “We thought a lot about whether that premium would still persist in an environment where rates are low. We eventually came away thinking there would continue to be a currency risk premia but it would be a bit lower.”
Gilmore said there was a lot of very intensive debate over the decision to remain fully hedged with the internal investment committee evenly split.
“Normally the internal investment committee would go to the board with a clear recommendation. In a rarity in this case we weren’t sure, so we presented that situation to the board, that was quite novel and the board also debated it. It was fascinating that we decided to present the nuance of the discussion in the internal investment committee and discus that with the board, the board found that quite helpful.”
The team also came away thinking that foreign currencies would be diversified which Gilmore said was important in an environment where it is harder to find diversifying assets.
In looking at the next five years Gilmore said the biggest change in the assumptions in assessing how to set the reference portfolio, related to rates.
“If we think of the last five or 10 years the one thing we have really underestimated, like many others, is how low rates could really go and how long they would stay low,” he said. “So our assumptions around real interest rates came down, we are now looking for real interest rates to be around 0.5 per cent over the very long term, which is quite a bit lower than before.”
The assumptions around the equity market remained quite unaffected with the assumptions of the equity risk premium “nudged up” marginally.
NZ Super’s most recent five-year reference portfolio review was completed in June, and while it remains largely unchanged – 75 per cent global equities, 5 per cent NZ equities and 20 per cent bonds – the process involved a lot of debate.
“The outcome almost looks like no change, but it hides a lot of detailed thinking and discussion,” Gilmore said. “Some of those discussions were challenging because we were sitting in an environment where we had the COVID shock, and we were trying not to think about the short term but the very long term.”
Gilmore said the reference portfolio review, which takes place every five years, is the most important investment decision the fund makes because it sets the risk appetite.
“And it also helps us get the right perspective, it’s an equilibrium concept.”
The fund’s actual portfolio deviates from this reference portfolio due to active risk decisions.
The biggest area of active risk has been the fund’s tilting program which takes advantage of the fund’s time horizon and strong governance arrangements – it is not expected to make material contributions to the budget until 2050.
The fund has also taken active risk via its exposure to timber, the credit space and through factor exposures.
New Zealand Super incorporated a low carbon approach into its reference portfolio in 2016, and that has added about 60 basis points per annum to performance since it was brought in.
The victory of Joe Biden over Donald Trump in the US general election is a “double repudiation” not just of Trump but of the “democracy in crisis crowd” who thought American democracy was under threat, argues historian and author Stephen Kotkin, the John P. Birkelund ’52 professor in history and international affairs at Princeton University.
The US system was not designed for good-hearted politicians, but to check the power of venal politicians and force consensus and coalition to get anything done, Kotkin said, speaking at a Conexus Financial event last week.
“The US system worked and the institutions are strong,” Kotkin said. “The genius of our system is that even with bad people we can sometimes get good results.”
Kotkin said the last time an incumbent president was beaten by a challenger with such a large percentage of the popular vote was when Franklin Roosevelt toppled Herbert Hoover in 1932.
Biden won because women in the suburbs swung massively in his direction, not because he increased his vote with traditional Democratic constituencies.
The result was also a backlash against racism, he said, with Americans increasingly mixed and in inter-racial marriages and no longer identifying racially the same way they used to.
“Trump’s vote among black people increased this time since the last time, 2016,” Kotkin said. “We know that 25 per cent or so of Americans are liberal, and 28-29 per cent are conservative, and 40 per cent are moderates. That’s the electorate and they repudiated the extremes. And give them credit, there was a kind of genius in that.”
With Biden having presented himself as someone who can unify both sides of politics, voters have “called Joe Biden’s bluff” by electing him with what is likely to be a Republican senate, although this won’t be confirmed until January, Kotkin said.
But deep divisions remain in American society and Biden will need to focus on possible areas of bipartisan consensus.
This could include providing broadband access to rural communities which are the base of the Republican Party, better funding community colleges and vocational education which educate more people than universities, and going after monopolies which dominate the economy and hinder new entrants.
“A deal can be made,” Kotkin said. “It requires Biden to govern from the centre and it requires Republicans to be cooperative, not obstructive. It remains to be seen, but I’m optimistic the option is there if both sides want to exercise it.”
Biden will also need to show he can build a working relationship with majority Senate leader Mitch McConnell, build a better working relationship with China, and manage the passions of the leftist wing of the Democratic Party, Kotkin said.
Stephen Kotkin will speak at the Fiduciary Investors Symposium on December 8.
The lines between sustainable investing and investing in general are blurring and will soon disappear. Yet there remains an important barrier to fully integrating a company’s sustainability performance into investment analysis—the lack of reliable, relevant, and comparable data on the different dimensions of a company’s sustainability performance. Today we have a plethora of NGOs working to set sustainability measurement and reporting standards, as well as ESG data vendors whose ratings are poorly correlated with each other.
Fortunately, there is now a very real possibility to solve this problem. The IFRS Foundation (IFRS) has issued a “Consultation Paper on Sustainability Reporting” proposing a Sustainability Standards Board (SSB) which would be a parallel body to the International Accounting Standards Board (IASB), with both being under the direction of IFRS.
One of the issues discussed in the paper and for which comments are requested is the important, complex, and controversial concept of materiality. It proposes that “If established, the SSB would initially focus its efforts on the sustainability information most relevant to investors and other market participants. Such information would more closely connect with the current focus of the IASB.”
We support this approach while at the same time recognizing that there are sustainability issues that are important to the world even if they currently do not have an impact on investor returns.
A good analysis of materiality is presented in another September paper “Statement of Intent to Work Together Towards Comprehensive Corporate Reporting (The Statement)” written by CDP, the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), and the Sustainability Accounting Standards Board (SASB) and facilitated by the Impact Management Project (IMP), Deloitte, and the International Business Council of the World Economic Forum (IBC/WEF).
The report provides a conceptual “three-box” framework which is very useful for the proposed SSB. The smallest box represents financial reporting standards, the traditional work of the IASB (and the Financially Accounting Standards Board in the U.S.). It sits inside a box of sustainability issues that are material for enterprise valuation creation, the focus of CDSB and SASB. Here the unit of analysis is the company, just as it is with financial accounting standards. The work of the SSB will be focused on the second box with the IIRC contributing a framework for integrating both sets of standards.
This box, in turn, sits inside one representing the total range of sustainability issues, which include the positive and negative externalities of a company’s operations, products, and services that make the world a better or worse place, such as through the lens of the Sustainable Development Goals. This is the domain of CDP, the GRI, and IBC/WEF. This is a system-level unit of analysis and is outside the boundary of work for the SSB, thus making its remit clear.
While some have argued that the SSB should include all sustainability issues and even extend to developing standards for reporting on science-based targets, we think that would be a mistake. One must walk before one runs. Simply establishing an SSB will be a major challenge in terms of funding and establishing the necessary capabilities. It also needs to move quickly, starting with climate and related environmental issues and then swiftly moving on to critical issues such as human capital and diversity & inclusion. Here it can rely on the work done by the authors of The Statement report and their public commitment to harmonize their efforts and, for climate, the Task Force on Climate-related Financial Disclosures.
Asking the SSB to take on a broader remit beyond the sustainability issues material to enterprise value creation would be impractical since it would greatly delay the needed global standards for sustainability reporting. A much better solution would be for the SSB to coordinate its work with those organizations that are focused on sustainability issues that are broader than enterprise value creation but very important to the world.
Over time, these issues can indeed became material from an SSB perspective through the concept of “dynamic materiality.” An issue that hasn’t been material to companies can become so for many reasons including system-level effects on all companies regardless of industry (e.g., climate change and inequality), changing social expectations of employees (particularly the Millennials) and customers, and laws and regulations (e.g., carbon taxes and minimum wage rates). When this happens, it will fall in the domain of the SSB.
The SSB is being established to meet the sustainability information needs of investors. Please help the IFRS Foundation help you by submitting a response to the Consultation. Oxford University’s Saïd Business School has submitted a letter that might provide some helpful guidance. Responses are due by December 31, 2020.
Richard Barker is Professor of Accounting and Associate Dean of Faculty , and Robert Eccles (pictured) is Visiting Professor of Management Practice at Said Business School, University of Oxford.
Bob Eccles will be speaking at the Fiduciary Investors Symposium online on December 8. For more information click here.
Organising teams to develop thinking outside of investment silos has helped Cbus navigate recent liquidity challenges and devote deeper thinking to structural trends, the A$54 billion fund’s CIO Kristian Fok has said.
“We were trying to make sure we weren’t just replicating a whole team of specialists and taking advantage of what asset owners have, and what fund managers don’t have, and that is we have a big portfolio and therefore leveraging the insights of those teams,” Fok said while explaining the fund’s changed approach during an interview on Tuesday for Investment Magazine’s latest Fiduciary Investor’s Symposium.
During the conversation Fok described the “substantial demand” from Cbus’s members for redemptions and transferal of individual fund balances to cash during the March market sell down sparked by the global pandemic and the subsequent payout under an Australian government mandated early release of superannuation scheme in response to the crisis.
At this time Fok said he and his team looked at the different ways to create liquidity without adversely impacting flexibility to invest when the opportunity to invest came about – and the opportunity did.
“There were a couple of days that were quite frightening in terms of how the market froze up until the Reserve Bank stepped in,” Fok said.
“[It meant] bringing together our cash management team to look at what was going on day to day… but also we have an implementation team who look at different overlays of futures and exposures also securities lending, also our equities and global equities teams, bringing them together and looking at different ways to achieve liquidity in different timeframes was an important aspect of getting through in a successful way but also investing in a substantial and rapid market recovery,” Fok said.
Cbus saw a quarter of a billion dollars switch into cash in one day right at the time markets had sold off, Fok said.
We needed to be in a position to meet those needs. We had to make sure we had a reasonable buffer around the cash available. In order to get that buffer we thought about other ways to unlock liquidity [that didn’t require holding excessive cash levels],” he said.
Along with pulling together thinking from its various teams Cbus went to its custodian to pull together private repurchase agreements, a move designed to unlock further liquidity buffers, Fok said.
“That was an important release valve because there might have been an extreme scenario,” he said.
Outside the box
The focus on stepping out of asset class specialisations will continue to influence the fund’s approach as it internalises more of its investment management capabilities and continues to consider the big trends influencing asset prices globally, Fok said.
“How do we think about positioning the portfolio coming out of low interest rates, how do we think about broader disruption, technology and automation, how will that disrupt existing assets and where we should be invested,” Fok commented, raising some of the structural trends teams need to step away from asset class silos to consider. He added macro considerations including economic growth, interest rates and diversifying factors to this list of broader considerations, too.
To help his teams step out of the sector review and “tick a box” mentality that can come with being asset class focused within a large asset owner, Fok said he has proposed to the investment committee that four of its 11 annual meetings focus on global macro economic thematics such as climate.
While one third of the assets Cbus has under stewardship is currently managed internally, Fok said it wouldn’t surprise him if 50 per cent of the fund was ultimately internally managed as its internalisation program continues to move forward at pace.
“We still have a lot of way to go to build out capacity in some areas,” Fok said. He pointed to debt and unlisted asset classes including infrastructure as areas the fund planned to continue to internalise capabilities for although he noted the infrastructure asset class would likely involve co-investment partnerships.
Fok said he believed in active management even though he expressed concerns about the direction listed performance benchmarks might drive some funds, particularly those skating close to periods of underperformance.