A global gauge to set the world aright

Crises from inflation to climate change are forcing transparency in how corporations measure progress in solving global issues.

A field of rapeseed is home to wind turbines in Saint-Hilaire-lez-Cambrai, France.

The first five months of 2022 have provided vivid illustrations of how the world’s problems have become even more interconnected. The war in Ukraine has exacerbated the effects of climate change on food insecurity in Africa and Asia, and its impact on fuel supplies has prolonged inflation and goods shortages resulting from the pandemic.

But the year may also mark a turning point in the way the world addresses its challenges. One sign is momentum toward setting standards in the way corporations measure their environmental and social impact and create transparency in the way they are governed.

Business leaders gathering at the annual meeting of the World Economic Forum in Davos, Switzerland, this week are considering a “global baseline” that would measure how well they meet their commitments on issues like climate change and inequality. The framework was drafted by a new International Sustainability Standards Board established by global leaders at the United Nations Climate Change Conference in Scotland last November and endorsed by the Group of Seven last week.

The need for better reporting standards has grown with a shift in public expectations. As the effects of climate change and social inequality become more widely felt, many investors are demanding accountability from the companies they buy as much as solid returns. That mirrors expectations among the wider public. A survey of the Edelman Trust Barometer released in Davos found that among 14,000 respondents from 14 countries, 77% “believe improving societal issues is a primary business function” and 71% expect CEOs to take a lead role in shaping policies to tackle global warming.

Tracking how corporations steward the public good, however, is complicated. Demand for corporate accountability has brought more confusion than clarity. There are now more than 2,900 investment funds worth $2.7 trillion, according to Morning Star, that are based on environmental, social, and governance criteria. That, in turn, has sparked a cottage industry of consultancies offering to help investors and corporations determine sustainability benchmarks. But no common standard exists.

A recent U.N. survey of 1,230 CEOs from 113 countries found that while 71% said they were working toward net-zero emissions targets in their companies, only 2% of the companies they represent had plans validated by a scientific metric based on the 2015 Paris Agreement goals.

Judging whether a company meets social commitments is even harder. “It’s difficult to compare what one company does to broaden financial inclusion to what another might do to further education,” Michael Froman, vice chairman and president of strategic growth at Mastercard, told the World Economic Forum. “Yet that is precisely the type of commitment we want to encourage.”

The United States, Britain, and the European Union have all announced plans to impose mandatory sustainability reporting requirements. The framework from the International Sustainability Standards Board is different, notably, because it would be voluntary. While it provides a baseline for rationalizing the approaches those governments have proposed, more importantly it is helping business leaders find a common language on issues they are embracing with increasing urgency.

“For too long, markets around the world have been ill-equipped to efficiently price the risks and opportunities related to a raft of shared social and environmental challenges, from climate change and resource constraints to economic inequality and racial injustice,” Maha Eltobgy, Brightstar Capital Partners managing director and chief sustainability officer, said ahead of the Davos summit. “To ensure resilience and drive towards progress, a coherent, comprehensive system of corporate disclosure is needed.”

As common threats draw the world closer together, the imperative has also grown to forge global solutions that rely on shared standards of accounting. Honesty in numbers will help ensure reliability in results.

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