Asset manager perspectives on materiality: how are they reflected in the IFRS sustainability reporting plans?
The Global Unions Committee on Workers’ Capital takes a look at recent consultation responses from Aviva, BlackRock, Fidelity, LGIM, State Street and UBS
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The March 2021 announcement by IFRS that it will establish a sustainability reporting standards board (SSB) that would focus its attention on material information that impacts enterprise value, and have an initial emphasis on climate-related issues, has raised concerns amongst investors, trade unions and civil society organisations who are keen to elevate ‘rights-based’ approaches in the sustainability reporting ecosystem.
The feedback submitted by six global asset managers who responded to the IFRS 2020 Consultation on sustainability reporting was analysed as part of the Global Unions Committee on Workers’ Capital Asset Manager Accountability Initiative. Responses from large asset managers carry significant clout in international consultations since they invest trillions of dollars across world markets and rely on a global client base which includes institutional asset owners like pension funds, whose trustees participate in the works of the CWC.
What are the key issues from a labour rights perspective?
The key issue of concern from a labour rights perspective in the IFRS announcement is related to the narrow focus on “enterprise value” which would emphasise “information that is material to the decisions of investors, lenders and other creditors” in reporting and prioritisation of climate-related reporting over broader environmental and social (E&S) issues.
Sustainability reporting frameworks can be classified on a spectrum: on one hand, there are those that focus on reporting of financially material sustainability issues that are likely to impact have a financial impact on the company (e.g., SASB); at the other end are the frameworks that set reporting requirements based on the E&S impacts that a company can have on rights holders, such as workers (e.g., GRI). A double materiality approach to sustainability reporting is meant to encompass both ends of the spectrum. Finally, dynamic materiality recognises that some issues that were not previously material may become so in the future. One example is the adoption of reporting on human rights due diligence, an issue that may not be financially material across jurisdictions now, but could become so should it be mandated in the EU.
The IFRS decision to focus on enterprise value will reduce the potential to include rights-based indicators. Indeed, the newly-created working group that will lay the groundwork for the SSB includes the Value Reporting Foundation (SASB and IIRC), the TCFD, the CDSB and the WEF. It does not formally include the GRI, which is most closely aligned with norm-based human and labour rights reporting.
Asset managers’ responses to IFRS consultation: reinforcing or undermining the profile of labour standards in sustainability reporting?
The CWC Secretariat analysed responses submitted to IFRS by six global asset managers to identify a) whether they supported the inclusion of E&S impact metrics (that go beyond financially material sustainability issues); and b) whether they supported an initial focus on climate-related financial disclosures. The six asset managers analysed are the following: Aviva (UK), BlackRock (US), Fidelity International (UK), LGIM (UK), State Street Global Advisors (US) and UBS (Switzerland).
US asset managers tended to favour the IFRS adopting a narrower focus on financially material sustainability issues while European asset managers were more supportive of the inclusion of human rights-based metrics. Aviva was the only asset manager that gave “priority” to double materiality at the onset and stressed that “standards which only address the impact of the environment on the company provide only a one-dimensional view which will not be sufficient for investors or users of the accounts more widely”. LGIM supported the concept of double materiality and asked for clarity on how and when the SSB would focus on the concept. UBS “supports” the concept of double materiality but called for a building block approach to tackle this “more complex topic area”. It did, however, stress its support for SASB, which does not embrace double materiality.
Fidelity International proposed a “structured approach” to sustainability reporting, for example around the Sustainable Development Goals, that would seek to cover the full range of ESG factors, which would eventually “evolve to the principle of double materiality”. BlackRock argued in favour of a focus on “sustainability topics that are material for enterprise value creation, rather than those that address a company’s impact on society”. While it suggested that the Value Reporting Foundation “would be an ideal partner for the SSB,” BlackRock merely called for the SSB to “coordinate” with GRI (note: IFRS proceeded with this configuration for the new working group). Finally, State Street asserted that the “consideration of sustainability factors in corporate strategies is a matter of value, not values” to capture the drivers of long-term shareholder value.
Asset manager views on the need to focus on climate first, versus ESG more broadly, also varied. Their views on double materiality were not necessarily indicative of their views on the SSB’s initial focus. LGIM was most direct in advocating for a broader approach stating that it “do[es] not feel that the SSB should initially focus on climate alone”. UBS also thought that “a broad focus from the start is important”. Fidelity International argued in favour of giving the SSB an “explicit mandate and objective covering the full range of ESG reporting”. BlackRock believes that “the SSB should prioritise establishing an overarching conceptual framework for sustainability reporting and initially develop standards addressing a small number of market-wide factors.” Aviva and SSGA agreed with the climate first approach.
Implications for asset manager accountability on social issues
The IFRS announcement on the composition of the working group to accelerate convergence in global sustainability standards, along with the intended focus of the SSB (enterprise value and, initially, climate), aligns closely with the views of US asset managers. It is a cause for concern for advocates of double materiality who wish to incorporate reporting requirements based on a company’s E&S impacts - including impacts on workers.
Shalini Ramgoolam is a Programme Officer with the Global Unions Committee on Workers’ Capital
Hugues Létourneau manages the Global Unions Committee on Workers' Capital.