Embracing impact materiality is a necessity for measuring financial resilience

By Peter Paul van de Wijs, Chief Policy Officer, GRI

“Managing impacts makes good business sense.” You might have heard similar statements before. CEOs of the largest asset management institutions — though they have become quieter recently — have emphasized that traditional reporting no longer fully captures all the risks and opportunities businesses face, in the medium and long term.

Many investors have come to understand that companies that care about issues such as climate, water use, the circular economy, and employee welfare will provide a better return on investment. To achieve higher returns, investors must commit to responsible stewardship, act in good faith, and recognize that issues such as modern slavery, environmental degradation or resource scarcity, and the associated social unrest, are not only ethically unacceptable but also present significant financial risks.

Despite the emergence of the ‘anti-ESG’ movement in recent years, particularly in the USA, it is fair to say that the classic view of the role of business — to provide goods and services while maximizing profits for its shareholders, with sustainability and profitability deemed as incompatible — is coming under pressure around the world. While this perspective might not entirely deny, for example, that climate change can affect businesses, it clings to self-regulation as the only way to enhance investor choices and corporate actions. It also fails to recognize that financial risks, including those driven by environmental stress or social harm, are no longer separate concepts.

Understanding a company’s sustainability impacts is now essential to financial decision-making in the markets. After all, these impacts can be seen as early indicators of financial risks. Even if not financially material at the time of reporting, most, if not all, of the impacts of an organization’s activities and business relationships on the economy, environment and society will eventually become financially material.

Investors clinging to a traditional viewpoint may resist change but will ultimately be confronted by the consequences of global warming and end up with a portfolio of stranded assets, reputational damage and diminishing returns. This holds true even in areas where sustainability issues are more widely supported. A recent analysis by the European Central Bank revealed a significant misalignment with the Paris Agreement climate targets among major financial institutions, exposing them to heightened transition risks and reputational vulnerabilities.

Although a cursory glance at the financial newspapers might suggest differently, market participants are increasingly, and publicly, recognizing that measuring and disclosing financial risks in isolation is insufficient for navigating the complexities of today’s economic landscape.

In fact, investors should demand that companies collect and share their ESG data with the same rigor as they collect and share financial data. That way investors can access the full overview of a company’s performance and make well-informed decisions. Demanding this from the large, listed companies will have a positive ripple effect throughout the value chains.

We observe this ripple effect also extending to financial markets, where improved sustainability reporting affects the issuance of green, blue, social, and sustainability-linked bonds, and investors increasingly favoring companies with strong sustainability performance.

The successful move to sustainability practices throughout the value chain is conditioned on the accurate and proportionate assessment of these practices by all involved. Investors and companies alike require mandatory corporate reporting to make available standardized, globally applicable and decision-useful data. The integration of impact data collected through the GRI Standards alongside financial data using IFRS Sustainability Standards can significantly enhance the global comparability of sustainability-related disclosures for investors and other stakeholders. This becomes even more critical when considering the interoperability of such data with European frameworks.

The time has come for investors to also press regulators around the world to adopt this increasingly harmonized corporate reporting system and avoid the complexities and inconsistencies that can arise from fragmented reporting approaches.

About the author

Peter Paul is the Chief Policy Officer of the Global Reporting Initiative (GRI), with responsibility for driving the adoption of the GRI Standards into rules and regulations set by (national) policymakers and capital markets around the world.

Peter Paul has over 20 years of professional experience in public policy, communications, and sustainability. In addition to leading his own business, Peter Paul has held executive roles at the LEGO Foundation and the World Business Council for Sustainable Development (WBCSD).

Earlier in his career, Peter Paul worked in international positions in communications, sustainable development, government affairs and issues management, at The Dow Chemical Company, including leadership of Dow’s Global Water Strategy Team. He holds a degree in Communications from the College for Economic and Business Administration Studies in Eindhoven, the Netherlands.