ImpactAlpha, Sept. 11 – Markets around the globe are likely to require corporations to report on their social and environmental impact before the end of the decade. Europe has led the push for mandatory corporate disclosure. The spillover already is reaching US companies that do business there, and the Securities and Exchange Commission is queuing up its own reporting regulations.
Some companies are getting ahead of the regulatory curve. Roughly two-thirds of S&P 500 companies and six out of 10 companies in the Fortune 500 currently report against the standards of the Global Reporting Initiative, a transparency effort spun out of Ceres by activists and investors 26 years ago following the Exxon Valdez oil spill in Prince William Sound, Alaska.
“Those organizations in the US that are using GRI standards today are going to be in a much better position to be able to respond to these newly mandated policies that are coming in from overseas,” says GRI’s JB Hillman, who with colleague Matthew Rusk, sat down with ImpactAlpha to discuss GRI’s US push and the evolving landscape of impact reporting.
The detailed GRI framework, now covering food security, biodiversity, human rights, as well as climate-related impacts and sustainable development, is among the most widely adopted organizational reporting standards, in use at some 10,000 companies in over 100 countries.
In the crowded space of sustainability reporting, the voluntary (vs. mandatory) GRI aims to serve multiple stakeholders (vs. just investors) and across national boundaries. Many reporting regimes prioritize “financial materiality,” for factors that drive enterprise value; GRI stands firmly behind “impact materiality,” for matters that affect the broader economy, environment and communities.
The new standards from the International Sustainability Standards Board, for example, cater specifically to capital markets and investors, say Hillman and Rusk. “That doesn’t necessarily account for systemic risk,” says Rusk. “A lot of investors care about long-term value and risk and impacts on other stakeholders.”
ImpactAlpha: Two out of three companies in the S&P 500 use the GRI standards, which I think would come as a surprise to many. What is the GRI and how did it get started?
Matthew Rusk: GRI was a response to the Exxon Valdez oil spill. It was driven by environmentalists and investors saying that ‘we need more transparency to make more informed decisions that align with their interests and values.’ We spun out of Ceres to drive more transparency and disclosures from corporates so that all these different stakeholder groups can make informed decisions.
We have the benefit and the detriment of being headquartered out of Amsterdam. That leads to a perception by some that it’s global, for the US audience sometimes meaning everywhere but here. But actually we’ve been well integrated as a habit for a lot of the Fortune 500, the Business Roundtable, embedded even as the landscape continues to evolve.
ImpactAlpha: What do you credit for the uptake?
Rusk: Globally, right now we are working with mostly a voluntary disclosure landscape when it comes to sustainability and impact reporting. There are 85 countries that have some semblance of policy that either references or requires the GRI standards and that’s over 300 policies now. But in the US, it’s definitely in a voluntary landscape.
The culmination at first was investor interest, and that there was not a mechanism to get more insight into impact and sustainability reporting, reporting on things that a larger spectrum of stakeholders care about. Over time, many see that as what will become financially material. That’s led to this being adopted over the last number of years.
We also see end consumers saying they want to buy with their values. And we see the power of labor right now.
ImpactAlpha: The workforce.
Rusk: You end up having all these watchdogs internally of what you’re doing. Are you being mindful of your social and environmental impact? Are you greenwashing? You’ll get called out internally. And so that’s become a really key and critical audience for organizations producing a sustainability report. One thing we need to do is help labor to understand that if they’re asking these things of their employers or employers of others, that a key ask could be to report to the GRI standards.
JB Hillman: We’re getting a pretty clear message from corporates about the difficulty with this new generation – to hire talent into an organization that isn’t living their values and isn’t doing what’s right by the planet and human rights. I have two 20-something year-old daughters, who really are critical about going to work for anybody that isn’t helping save the planet and treating people well. Corporates are starting to feel some pressure to get the next generation of talent in the door.
ImpactAlpha: Do companies use GRI standards as a report to these various stakeholders or are they using it to analyze and improve their operations?
Rusk: That first call out was by external stakeholders. Now there’s a real appreciation from the internal stakeholders that use it. As you go through this stakeholder engagement process, and this materiality assessment, and where are these impacts that you should be mindful of that matter to your stakeholders, that leads to a great management tool to say, ‘Wow, we are using a lot of water here in Arizona, and the local community doesn’t like that, the regulators aren’t liking that and our employees see that and it’s not their favorite thing.’ That’s going to show up as financially materially relevant, today, if not soon on the horizon.
Hillman: I think one of the things that Matt was alluding to earlier is our theory of change. We are providing a foundational set of standards that require transparency, which leads to accountability, which needs to change. If you’re not transparent at the very beginning of that process, you’re never going to get to the end result.
The more it gets integrated into the way you work, and business as usual, the more you have that ability to think about changes that will positively impact the world around you. And not just your financial reports and your financial performance, but serving the other constituencies. We play a relatively small role, but I think a leverageable role in enabling that change.
ImpactAlpha: GRI is increasing its presence in North America. Why now and what will that look like?
Hillman: GRI is a fundamental organization to help shift away from the financial-only focus of US business. It’s been a voluntary reporting standard, as we mentioned earlier, still remains so in the US. That’s going to change.
Matt talked earlier historically, this shift to Europe, got us out of sight out of mind from the United States for a long period of time, candidly including our leadership for a while. That ramping up again of a critical market globally for GRI and for our constituents and for our corporate constituents, has us in the right place at the right time to invest.
ImpactAlpha: You said reporting is about to not become voluntary. What do you mean by that?
Hillman: If you look at the momentum of regulations around the world, I think about the tax world I came from, a lot of the mandatory reporting and regulation that happens tends to come from outside the US. Europe, especially, is a much more forward thinking region than the US. If you think about what’s coming out with some of the regulations overseas, it’s already mandatory reporting for some parts of North America-headquartered businesses that are doing business in Europe.
ImpactAlpha: What specifically is mandating that in Europe?
Rusk: There’s an evolution of the Non-Financial Reporting Directive, or NFRD. But what’s incoming is the Corporate Sustainability Reporting Directive, or CSRD, sustainability reporting. GRI was a co-constructor with those European sustainability reporting standards that are going to be mandated for about 50,000 European companies to use. Because we co-constructed it with The European Financial Reporting Advisory Group, or EFRAG, they are essentially GRI standards in a bit of a different package. It’s a bit of a subset of GRI.
It’s estimated by Refinitiv that 10,000 organizations outside of the EU will directly be impacted. That’s about 3000 US companies and 1300 Canadian companies. There were 11,700 that were affected by the predecessor of this. They’ll get pulled into this first and that’ll be on 2025 and 2024 data.
Then a few years later it will reach 50,000 European companies. But then I think it’s 2028, any organization that has revenue of over 150 million Euros in the region, whether you’re headquartered there or not, will have to report on your impacts. The threshold to get hit by it is quite low.
ImpactAlpha: And in the US itself, the pressure building around disclosure as well, correct?
Hillman: Absolutely. The rhetoric and the activity around this here is starting to develop much more quickly. We were just in a couple of conversations over the last few weeks with the Securities and Exchange Commission just educationally talking about GRI and helping them raise their awareness of who we are and what we do here. Even though two thirds of the Fortune 500 in the US are using our standards, there’s a lot of pretty critical organizations that know very little about who we are, mostly because it’s voluntary.
The flip side of what Matt just said is that those organizations in the US that are using GRI standards today are going to be in a much better position to be able to respond to these newly mandated policies that are coming in from overseas.
ImpactAlpha: What about the climate disclosure rules coming out of that SEC? Does GRI help inform companies that will report against that?
Rusk: A helpful lens to think out the GRI standards is an aggregate of what works when it comes to corporate and other organizations’ disclosure. Right now, if you report to GRI and climate action is a material topic or climate impacts, you essentially satisfy TCFD 80%. A lot of these other jurisdictions have rallied around TCFD, but that’s a framework not a standard, so it has to be standardized to create comparable and consistent disclosure. We have a little bit of unknowns with the SEC because we’ve seen their proposal, but they’ve gotten a lot of feedback on what that should look like. It’s all speaking the same metrics and language, which is what we find really pertinent and important.
ImpactAlpha: I wanted to get into the ESG backlash. There’s been push back on greenwashing, SDG- impact-washing, on the one hand. And then on the other, there’s a political backlash. How is GRI thinking about those criticisms?
Rusk: One thing that hasn’t been picked up and tossed into the political contentiousness is transparency. That’s what our organization aims to do. It is a mechanism and a tool, a standard to foster transparency for all these other stakeholders to make the decision in their interest to align with their values.
ESG was actually a helpful term for a couple of years because it actually organized sustainability and disclosure around sustainability, organized in a way that was helpful to investors in these buckets that they were interested in. Then it became this boogeyman to certain groups and was representative of something different.
The pushback on that does seem from our vantage point, and from many but, maybe not enough, nonsensical. You’re asking investors to take those lenses off. You’re asking them to make decisions somewhat blindfolded where otherwise they could have more information and make more informed decision making in their fiduciary responsibility. Some of that may bring in systemic risks that are going to involve the assets that they manage and the pensioners or asset owners that they aim to serve.
You’ve seen some of their policies in very red states fail because they realize actually serving fiduciary duty if you take off that lens or force a change in who you’re working with as an asset manager is going to be more costly to this state and those who they work to serve.
ImpactAlpha: And greenwashing?
Rusk: Once again, transparency and accountability in a comparable and comprehensive way to say, ‘Yes, this is what we’re doing, or, This is where our impact is today. This is how we’re managing those impacts. But we’re not there yet.’ GRI standards make it so you don’t report on what you want to, you report about what your stakeholders care about.
Hillman: First is to be more visible, impactful and part of that difficult dialogue that’s going on. We can’t be absent from it. We can’t let it happen around us. We need to be a part of it. And we’ve really not been that to date as much as we ought to be.
The flip side of that is the grassroots. We have critical work to do to educate people, to get them to be part of our mission to bring the next generation of sustainability experts into the world that know about GRI. Our ability to respond to both of those things in the past has been limited. That decision as an organization is changing.
Rusk: Now we see the current uptick, but we know in this space, as more disciplines get involved and are clamoring for more disclosure, with a new standard or new framework that can be distracting from what already has a proof of concept and already has this uptake. If we switch gears and try to change an aircraft carrier that’s already in motion and has some proof of concept and working to switch to something new that may be a detriment to sustainable development, impact reporting and serving all stakeholders, especially if that move is to something that just focuses on investors.
ImpactAlpha: You seem like you’re hinting at specific standards that target investors. What are investors potentially shifting to that’s not GRI?
Rusk: The International Sustainability Standards Board has captured a lot of attention with their new standards. Their mandate is specifically to cater to capital markets and the investor audience. That can be seen as the one that should garner the focus and attention to serve that stakeholder group. And in many ways that’s a stakeholder group that can be heard loudest.
That doesn’t necessarily account for systemic risk. A lot of investors care about long-term value and risk and impacts on other stakeholders. There’s been a recent conversation and it’s come in part due to the ISSB public comment period right now of where priorities should lie for them. It is a piece of the puzzle and in some ways, maybe yes, a global baseline for sustainability and climate disclosure. But that baseline is just focused on the investor audiences and not speaking enough to impact.
ImpactAlpha: Be crystal clear on where it falls short. Is it ISSB’s relevance to other stakeholders other than investors?
Rusk: Yes, but in addition to that, some investors are saying it doesn’t go far enough to speak to organizations’ contributions to systemic risk, because a lot of these investors hold a portfolio of many different organizations. What is not financially material to Company A, but they are producing externalities that are affecting Company B in that same portfolio. That’s of interest to the investors. It’s not of interest to Company A.
That’s where we’re seeing some investors say we need more. Whereas GRI 3, a particular standard of ours that goes through the materiality assessment, that process isn’t embedded in the ISSB. That could lose some identification of risks because of impacts that an organization is having.
ImpactAlpha: What do you believe so far has been the lasting impact of GRI and where do you see that impact going forward?
Rusk: It’s enabling these conversations. And there’s now an appreciation for disclosures. We want reporting to be a means to an end. But we need to get the reporting all on one page and I think we’ve done a lot to get there.
With all of our standards, we have to embed five different constituency groups in the development of that standard. It’s labor, business, investors, civil society, and then mediating institutions, which is a bit of a catch all but you see academia, the big four accounting firms. They also need geographic diversity. So that’s why I’m excited by our expansion to make sure we not only bring these global standards in and used in North America, but also to make sure the North American perspective is embedded in these standards.