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Article

Is the Global Convergence of Sustainability Reporting Possible?

Is the Global Convergence of Sustainability Reporting Possible?
Accounting
Published on:

Companies are increasingly encouraged, or obliged, to report on their sustainability efforts. However, there is little harmonization across the many sustainability standard-setting organizations. In their latest study, Accounting Professors Hervé Stolowy and Luc Paugam of HEC Paris set out to create a picture of the status of sustainability reporting standards today, and what they really mean.

Three key findings:

  1. Lack of standards harmonization: A significant lack of harmonization in sustainability reporting standards pose challenges for consistent communication of companies' sustainability efforts.
  2. Diverse objectives: Standard-setting organizations have diverse objectives, complicating efforts to establish a globally standardized approach to sustainability reporting.
  3. Carbon emissions disclosure: One exception may be carbon emissions disclosure, with convergence in the greenhouse gas emission protocol being adopted by most organizations.
ESG standards cover

TotalEnergies, an oil and gas giant with a questionable history of sustainable efforts, has an immaculate record when it comes to sustainability reporting. It is compliant with seven international standard setting bodies. Is TotalEnergies a pillar of sustainability to be revered by others? Or is its sustainable legitimacy questionable? 

Today, a company seen as sustainable can attract considerable investor interest. Increasingly, investors, shareholders and other company stakeholders turn to sustainability reporting as a way of understanding more about the success of a company.

 

Sustainability reporting means disclosing how a company integrates factors related to the ESG, and what it does to improve it.

 

And what is sustainability reporting? In essence, it is a way of disclosing how a company integrates factors related to the Environment, Social, and Governance (ESG), and reporting what it does to improve its impact on those dimensions. As a measure of business success, it goes beyond the clear-cut standards of traditional financial reporting. Given the absence of standardized definitions for what constitutes "sustainable," the potential influence of varying political motivations across different regions, and the involvement of multiple entities in setting standards, an important question arises: "Can sustainability reporting be harmonized?"

Harmonization – or convergence – of standards

In 2005, Europe adopted the International Financial Reporting Standards (IFRS) which was a major factor in establishing the worldwide legitimacy of IFRS we observe today. This led to convergence on a unified set of financial reporting standards and the overall harmonization of financial reporting.

However, when it comes to sustainability reporting, it seems that standard-setting may not be as straightforward. We set out to investigate the hurdles that are getting in the way of sustainability convergence.

The four hurdles

1. Sustainability definitions

There is a large degree of heterogeneity in the definitions of sustainability concepts. But if we do not agree on what we are standardizing – how can we converge?

Across the standard-setting organizations, definitions vary widely to include different concepts such as corporate social responsibility (CSR) and ESG. The definitions of factors contributing to these concepts also vary, for example some may view nuclear power as a green investment, others may not. In addition, we also see that there is evolution in the definitions of “sustainable” in different regions over time. 

2. An unprecedented number of standard-setting organizations

We found that there is an enormous number of organizations – 17 – involved in sustainability reporting around the world. They comprise not-for-profit organizations, business consortiums, charities, and United Nations initiatives. Needless to say, getting 17 organizations to agree on factors and definitions and implement them is far more difficult than getting three organizations to converge on standards. 

3. Differing requirements

There is a diversity of reporting requirements across the major standard-setting organizations. 

At the international level, the IFRS Foundation has created the ISSB (International Sustainability Standards Board). In Europe, the European Sustainability Reporting Standards (ESRS) are set by the Sustainability Reporting Board (SRB), a committee within European Financial Reporting Advisory Group (EFRAG). Listed firms in the US follows the requirements of the Securities and Exchange Commission, which initiated discussions about climate-related financial disclosures. The reporting requirements are not standardized across these bodies, and companies adopt different ways of reporting due to the diversity in reporting requirements.

4. Diversity in objectives

There is diversity in the objectives of the standard-setting organizations. 

The organizations have different overall objectives and appear to disagree on what the focus of sustainability reporting should be. Specifically, Europe adopts a “double materiality” approach, focusing on the financial and societal impact of sustainability. In contrast, the ISSB (or the SEC) approach is that of “single materiality,” meaning that it focuses only on the financial impact of sustainability matters.

Is there a convergent future?

In summary, the hurdles to global convergence of sustainability reporting are substantial and multifarious. They involve opinions, social factors, and political motivations and it is hard to see any form of harmonization in the near future. However, one exception may be carbon emissions disclosure, with convergence in the greenhouse gas emission protocol being adopted by most organizations. 

 

In the present situation, companies like TotalEnergies can pick and choose from a menu of standards, enabling them greenwashing.

 

 

In the present situation, companies like TotalEnergies can pick and choose from a menu of standards. Due to the lack of convergence, they can take advantage of sustainability reporting to enable greenwashing. And without a standardized approach, this will doubtless continue.

Despite convergence for sustainability reporting looking bleak, there is a move towards making sustainability reporting compulsory in some regions.

 

There is a move towards making sustainability reporting compulsory in some regions.

 

South Africa was one of the first countries to make integrated reporting compulsory for all companies on the stock market. Now, Europe has issued a draft on European Sustainability Reporting Standards (ESRSs), under which companies will need to publish separate sustainability statements as part of their management reports from 1 January 2024. As a result, we are likely to see some convergence of reporting within Europe, but whether this spreads to a global set of standards remains to be seen. 

 

***

Learn about the role of ESG with this RESKILL Masterclass and its written summary with Hélène Löning: "Can ESG Save Life on Earth? Key Lessons".

Learn more on: "How Will New European ESG Reporting Standards Affect Companies?” with Marieke Huysentruyt.
 

Methodology

We created a list of global organizations involved in sustainability reporting. We found 17 in total. 12 were involved in reporting/disclosure and 5 involved with sustainability in general. We then carried out an empirical analysis to investigate the available sustainability reporting standards by looking at adopted standards and exposure drafts. We also carried out a deep-dive into the reporting of TotalEnergies, and that of Redefine Properties, a South Africa-based Real Estate Investment Trust.

Applications

Our investigation into the hurdles to harmonization and convergence reveals that they may be difficult to overcome. Without convergence, stakeholders need to be aware that it is difficult to directly compare the sustainability of companies based on their self-directed reporting. This leaves them open to greenwashing and makes it difficult to make sound investment decisions. However, we highlight that Europe’s intent to make publishing sustainability records mandatory may shift the tide towards a more standardized approach.
Based on an interview with Professors Hervé Stolowy and Luc Paugam on their Opinion paper “Sustainability reporting: Is convergence possible?” published in Accounting in Europe 2023, Volume 20, Issue 2.

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