Interoperable in theory, approximate in practice
Sustainability standards are converging, but the data they produce still doesn’t line up. That is the case made by ‘Lost in Translation’, a new report from the Future of Sustainable Data Alliance (FoSDA), whose members include Bloomberg, LSEG, MSCI and S&P Global.
These are firms that reconcile the mismatch between frameworks every day, so they know the challenge well.
Nearly 40 jurisdictions are adopting, using or aligning with the IFRS Sustainability Disclosure Standards of the International Sustainability Standards Board (ISSB). The European Sustainability Reporting Standards (ESRS) are reaching companies well beyond the EU. The two regimes overlap on key matters such as climate, greenhouse gas (GHG) emissions, transition plans and pay, and guidance, memoranda and mappings have been published in support of interoperability. It is reasonable to expect the data to follow.
However, the devil is in the detail, and only an approximation of comparable data is reaching investors. Sometimes the problem is definition. Both regimes ask for sustainability-linked remuneration, but the ISSB wants the percentage of executive pay linked to climate, while ESRS wants the proportion of variable pay for members of administrative, management and supervisory bodies that depends on sustainability targets. The people, the pay base and the subject all differ, so investors cannot automatically compare the results. At other times the problem is labelling. Scope 1 emissions are “gross” in ESRS, “absolute gross” in the ISSB Standards and “gross direct” in the Global Reporting Initiative (GRI) Standards. A human reader sees one metric, while a machine may see three. And sometimes the problem sits within a single company. One of the report’s examples is a company whose sustainability report and annual report give different emissions figures for the same period, because one uses worst-case values and the other a granular breakdown. Even a company can disagree with itself.
For reporting rules built from scratch and rolled out worldwide at the same time, comparability should be better, and can be. FoSDA proposes a concordance: a precise mapping, developed jointly by the European Financial Reporting Advisory Group (EFRAG) and the ISSB, of where requirements are identical, similar, different or absent. It wants the mapping to sit at the level of the digital taxonomies. A concordance pinned to taxonomies can be versioned and validated, which a PDF cannot, and the report suggests the 2024 EFRAG-ISSB climate interoperability guidance as the test case.
This concordance would provide vital understanding of where the frameworks differ and possible routes to harmonisation, but it is only part of the answer. Each of the problems above has its own remedy. For the pay mismatch, FoSDA wants common terminology, definitions and units across regimes, with a different term whenever a data point means something different. For the labelling problem, digital tagging helps, because the machine label stays fixed whatever the human label says. And for the company that contradicts itself, a single tagged source would let it use the same figures in every report, or at least reconcile them. Tagging makes differences visible, but only agreed definitions remove them: the two pay measures would simply get two different tags.
Over the coming months, FoSDA will ask stakeholders whether a core set of common disclosures is achievable, whether a concordance would help, and whether structured formats and digital tagging should be pursued. We recommend that our readers weigh in and we are delighted that the topic will be covered in detail at Data Amplified… in 24 days!
Read the full report here.
