Will the industry lean into honest performance reporting – warts and all?

Comprehensive reporting needs to focus on double, and context-based, materiality

There have been a number of ‘impact reports’ and ‘impact calculators’ launched over the past few years – many rich with information, both qualitative and quantitative. What there’s been less of is clear articulations of what the reported data covers and what it doesn’t – what it means (the context), and how it’s measured against thresholds (agreed ecosystem thresholds – boundaries – and/or social thresholds). This isn’t entirely surprising given the lack of clarity around sustainability reporting and availability and analysis of data.

At Tribe, we report on performance, not impact. Much like the weather, performance happens daily and is subject to ebbs and flows. Much like the climate, impact happens over an extended timeframe, the measures of which relate to the outcomes and the value that has been created as a result of any investment.

In order to claim impact, it has to move through the standard cycle of understanding the inputs and what those inputs lead to in terms of outputs. Only then can those outputs start to be contextualised, over time, in terms of what they go on to create (the outcomes). From there we can then start to better understand the impact of those outcomes and the value that has been created.

Data like this requires multi-year investment, management, monitoring and disclosure. This is easier said than done, however, not impossible. Often the data is not available to be able to do this. And, if it is, it can be subject to inaccuracy based on assumptions.

One of the biggest issues investors in public markets face is the presence of the secondary market, and what can and cannot be claimed as ‘ownership’ (that’s another discussion in itself). It’s fair to say, ‘impact management and reporting’ isn’t an easy area for an investment manager to engage with, but one that must be in order to better understand investment decisions and their ramifications for the real world.

Frameworks to use

With all this in mind, there are many frameworks that enable an investor to look closely at their performance over time and what it leads to. For example, the PwC Total Impact Measurement and Management framework, the Social Return on Investment model, and many of the Global Impact Investor Network’s IRIS metrics are some of the current frameworks investors can use.

The Impact Management Project’s Impact Management Platform provides investors with a suite of tools to create their own frameworks that can deliver reporting integrity. The Global Reporting Initiative standards and Sustainability Accounting Standard Board (SASB) standards are additional tools.

And the new and evolving draft frameworks in the market in beta modes and/or out for consultation can provide some handy tools to begin to engage with – for example, the International Financial Reporting Standards Foundation’s Sustainability Disclosure Standard Exposure Draft  (that will supersede the SASB), the Taskforce on Nature-related Financial Disclosures and, quite excitingly, the United Nations Research Institute for Social Development (UNRISD) Sustainable Development Performance Indicators that tackles one of the most hotly debated topics in management reporting and disclosure – context-based materiality.

Much of the reporting released to date by the finance sector has related to a single material issue – the risks that an investment faces. Comprehensive reporting, and impact reporting, needs to focus on double materiality (the risks the business faces, as well as the risks the business creates and contributes to), as well as, context-based materiality (setting disclosure in the context of full performance and environmental and/or social thresholds/parameters that the business works in – for example, nature/ecosystem and community-based thresholds). This is where the work of UNRISD and r3-0.org is particularly exciting.

We’re at the frontier of a new era in disclosure. What’s currently insufficient will soon, we hope, improve radically. It does challenge the role of extra financial rating agencies and data providers. In a world where double, dynamic and context-based materiality will define the decision making of the future, and, therefore, disclosure, they will need to be able to pivot accordingly to support this transition.

The question for investors is integrity. In the face of increasing regulation to counter greenwashing, will finance be accountable for what is reported and how it’s reported? As new rules come into play that will govern what can and cannot be claimed as sustainable and/or impactful, will the industry lean into more honest performance reporting, warts and all? Will the industry contextualise their data and stories clearly so that clients ultimately understand the footprints they are supporting and investment managers better understand the real-world consequences of investment decisions? I hope so!