Sustainability Stars: Value Reporting's Janine Guillot

(Marsha Vande Berg is director of MJGlobal Insights, a resource for corporate and fund decision-makers when shaping their dynamic sustainability stakeholder narratives. The former CEO of the Pacific Pension & Investment Institute, Marsha has worked with pension executives worldwide. A Stanford University Distinguished Careers Fellow and author of MJGI Briefs, you can reach her on LinkedIn or Twitter.)

SAN FRANCISCO (Callaway Climate Insights) — Janine Guillot, CEO at the Value Reporting Foundation, soon to be merged with international accounting standards overseer IFRS Foundation, and special adviser to the chair of the Foundation’s International Sustainability Standards Board (ISSB) joined me in conversation on April 25. I have known Guillot and her work since she was chief operating investment officer at CalPERS, 2010-2013, intersecting at points in her career that now include SASB/VRF and the IFRS Foundation’s International Sustainability Standards Board (ISSB).

It is with pleasure that I shine this deserved Sustainability Stars spotlight on Guillot in her integral role on the team that is working diligently to deliver serious global baseline standards for corporate disclosure of ESG risk and the necessary strategies for mitigating that risk. With increased transparency resulting from standards, the markets can direct capital and investment toward climate solutions and ESG issues generally and then help facilitate the economy’s transition away from fossil fuel dependency.

With two proposed baseline standards now out for public comment through mid-July, one for climate risk and the other for ESG exposure generally, the ISSB hopes to accomplish its mission to put in place a series of standards, with the first two out by the end of this year. Critical to their success will be achieving interoperability with interests and rules in various jurisdictions and specifically those that embrace the financial accounting rules of the ISSB’s sister standard setter, the International Accounting Standards Board (IASB).

Indeed, the ISSB’s rigorous process points to the potential for all or some of these 140-plus jurisdictions to favor adoption of the standards. A part of that process involves review by the independent International Organization of Securities Commissions (IOSCO), an organization of 33 securities regulators, including the SEC. Obviously, the organization’s imprimatur will reflect the weight of its members. Meanwhile, the G7 also has lent its support to the ISSB’s “path” to a global baseline.

Clearly getting disclosure right can be a politically fraught, detailed and at times hair-splitting process. Institutional investors continue to drive the momentum that is now focusing on regulators and their responsibilities to ensure capital markets are transparent and operating with credible and consistent information. Part and parcel of that is ensuring that all market participants have access to the information they need in their respective decision-making. What’s been missing, however, is the single set of credible standards and disclosure rules.

Getting to that single set of standards may continue to prove elusive at least for the time being. But at least there are now fewer players at the table. Circumstances are not unlike those that describe the history behind the two sets of financial accounting rules that are followed by most companies today. In the U.S., companies use the U.S. GAAP (Generally Accepted Accounting Principles), first created after the 1929 stock market crash. In Europe and parts of Asia, companies use the IFRS accounting standards.

While there have been efforts to align the two sets of financial disclosure practices (the so-called Norwalk Agreement), these otherwise good intentions now appear to be stymied. Nevertheless, there are high hopes that convergence will be possible between the ISSB’s sustainability disclosure work and that of the SEC, given that the latter represents the deepest capital markets in the world. A key factor favoring alignment is that the architecture of both builds on the TCFD disclosure framework.

(The Task Force on Climate-related Financial Disclosures was created at the behest of the Financial Stability Board in 2015 to develop consistent, climate-related financial risk disclosures. The UK was the first G20 country to enshrine mandatory climate risk and opportunity disclosures into law.)

Guillot has been front and center in this monumental undertaking that began with an effort to consolidate the work of five independent organizations, each with its own mission, governance and operations, and culminating in support of creating the ISSB. At COP26 last November, the ISSB’s creation was announced, in addition to VRF’s consolidation into the IFRS Foundation to help establish the ISSB.

Prior to that, Guillot led the 2021 merger between the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC) into the VRF, combining expertise related to standard setting (what to report) and framework development (how to report). She now leads the merger of the VRF with the IFRS Foundation while working in tandem to support the ISSB and its mission.

Complicating this already complex scene is the fact that the ISSB is not the only disclosure show on the world stage. The European Commission and countries within the European Union have continued to lead the way with legislation and rules through taxonomy, disclosures and benchmark regulation.

Meanwhile, the SEC now has out for public comment a set of proposed rules for sustainability disclosure by U.S.-listed companies and foreign companies engaged with U.S. capital markets. There also are multiple efforts underway in capitals ranging from London to Ottawa, Tokyo to Singapore, in South America, South Africa and China.

There’s an opportunity to increase alignment between these various initiatives, resulting in a global baseline of sustainability disclosure for the capital markets.

Simply put, sustainability disclosure is not a matter of if, but when. Noteworthy is that many countries already require climate disclosure in line with the framework set by the TCFD.

At the same time, it’s a distinct possibility that lawsuits and/or politics on Capitol Hill will succeed in holding up the SEC’s proposed rules and in effect allowing U.S. companies to sidestep requirements for the time being. Still pressure will continue to drive disclosure requirements even in the face of market turmoil, inflation and the energy crunch created by Russia’s war in Ukraine.

Disclosure benefiting investors and capital markets is an event whose time has come. And Guillot is already front and center.

Here’s our interview:

Question: Will requiring disclosure of a company’s carbon footprint really make a difference with climate change? Will we be able to touch, see, feel the impact?

Guillot: The way to think about the information that gets disclosed is measurement is a precondition for action. So to move from words to action, measurement and targets are one of the most powerful tools to do that. I hate to say this because it’s repeated so often, but what gets measured, gets managed. That’s actually a true statement. So this is about disclosure not for disclosure’s sake but to have clear measures that enable decision-making and progress.

Q: Will we see the impact of disclosure integrated with corporate financial statements? Or are we to expect separate sustainability statements?

Guillot: That’s a complicated question. Financial statements are a form of disclosure and reflect reporting to investors that is driven by legal requirements - which may differ from regulatory jurisdiction to regulatory jurisdiction. So it’s hard to answer that in a global context and in terms of a location for disclosure.

The way I talk about this is it’s about getting disclosure about climate and more broadly, sustainability information to investors. Whatever communication tools are primary, that’s what gets used. It’s really about communicating that information through the lens of governance and strategy and risk management. It’s also about how sustainability information, including climate, is being integrated into governance, strategy and risk management processes and then how targets are being set, how progress is getting tracked, and then how progress toward those targets is measured.

Q: What do you see as the lay of the land for disclosure rules, both as a result of the SEC’s rule proposal last March and then the work you are doing now at the ISSB? Will regulators ultimately unite behind a single set of reporting requirements? Will they embrace ISSB’s mission to set the global baseline standards?

Guillot: There are a couple of things in the SEC’s proposed climate rule that we are very encouraged about. One is the significant alignment the SEC’s proposal has with the ISSB’s exposure draft of its climate standard. So a little background. The ISSB just issued exposure drafts of two standards, one on general requirements for sustainability disclosure and the other on climate disclosure. So broadly, there is significant alignment between the SEC’s draft rules and the work of the ISSB.

The reason is both heavily leverage the TCFD recommendations. However, the one place where they are not aligned is the ISSB’s climate exposure draft includes industry-based requirements that are sourced from the SASB Standards. The SEC on the other hand did not go so far as to include industry-based requirements. So both are built on the TCFD - but ISSB has these incremental disclosures that are industry based.

Q: It seems the SASB Standards would be helpful in facilitating more granular disclosure that is also industry-based. Why do you suppose the SEC chose not to include these voluntary standards in its 500-plus page document, especially when a number of the mega institutional investors asked that they be integrated during the initial period that led up to the proposal’s announcement?

Guillot: Yes, there were many, many comments that suggested that the SEC rule incorporate both TCFD and SASB guidance, and there’s actually a footnote to the proposed rule that notes everyone who mentioned SASB and TCFD. I’m speculating here and of course I can’t speak for the SEC, but I do think there's a limit to how much detail the SEC could include. Prescribing industry-based disclosures across 68 industries, well, I think that had to be a lot for the SEC to require.

Q: But as you, or was it you channeling Harvard’s Michael Porter, when you said what gets measured gets managed? SASB Standards already are widely used and widely used on a voluntary basis. Could it happen that the SEC gets their rule on the books and in the course of implementation, the regulators incorporate the actual SASB Standards? I think it would be helpful.

Guillot: What we are advocating is that the SEC encourage use of the industry-based standards on a voluntary basis or supplemental basis — or something along those lines. The SEC wouldn’t necessarily require their use but would acknowledge that investors value them — and that’s something they heard certainly during their own consultation process.

Q: How long do you think this process will take – at the ISSB as well as the SEC?

Guillot: There’s also a process underway in Europe as well as in other jurisdictions. With regard to the SEC’s proposed rule, I don’t actually know the timing. For now, the comment period on the proposal is set to close in May. (The SEC subsequently extended the deadline to June 17.) My guess is they are going to want to get something done fairly quickly.

For the ISSB, the comment period closes at the end of July, and the goal is to issue both the climate and general requirement standards by the end of the year. Of course that’s completely dependent on how much public comment comes back and what those comments are, but the goal is definitely to issue something by the end of the year.

Q: And ISSB is working on additional standards at the same time?

Guillot: Right now, the ISSB is completely focused on the two baseline standards. Well, that’s not entirely the case. The ISSB also will be moving forward with its acquisition of all existing SASB projects. So we will be consolidating the work of SASB Standards and the Integrated Reporting Framework (now under VRF, as a result of the SASB/IIRC merger in June 2021). June 2022 is when the ISSB will take ownership of the SASB standards together with some 10 projects that have been underway. These projects include a fairly sizable human capital research project that we anticipate could lead to a proposed standard.

Q: Are we talking about a standard or a rule?

Guillot: The SEC’s language talks about putting down rules. The ISSB talks about setting standards for disclosure.

Q: So is it correct to assume that there will be additional baseline standards beyond the all-inclusive standard that is now under consideration along with the climate proposal? For example, should we anticipate a draft proposal based on VRF’s work on human capital as a separate, stand-alone disclosure topic?

Guillot: What the general requirement standard says is there should be disclosure of all material sustainability issues that reflect the company’s governance, its sustainability strategy, its management of associated risks and the targets and metrics it uses in support of its disclosure. It also references the SASB Standards as the tool for identifying the sustainability issues that are most likely to be material industry to industry.

This means the industry-based concept on which SASB Standards were developed will continue to move forward via the ISSB. It also means that the ISSB will continue to build on those Standards as it incorporates SASB’s research projects, including the large projects that are looking at topics across multiple industries — human capital, for example — as well as topics that are in fact industry-based.

Q: What do you think will happen to the VRF once the merger is completed? Does it simply fade away?

Guillot: The Value Reporting Foundation goes away as an entity as of June 30, 2022. It’s just like an acquisition. Think of it in terms of a corporate acquisition even though we are talking about two non-profits. It’s the same thing. The IFRS Foundation acquires the Value Reporting Foundation and the IFRS then essentially owns the intellectual property, the relationships and the team. The SASB Standards also transfer to the IFRS Foundation and the ISSB takes over responsibility for the standards. The SASB Standards Board will sunset at the close of the merger.

Q: So I have to ask what happens to the Level I and Level II Financial Services Accounting credential, the so-called FSA credential – which in full disclosure, I have completed the Level I certification and will take the Level II exam in September. Will these credentials still be relevant under the IFRS/ISSB ownership structure?

Guillot: I get that question often! Yes, the FSA credential will continue to be incredibly relevant because the SASB Standards will continue to exist. The SASB Alliance (which consists of individuals and businesses who support the SASB Standards) also will continue as an evolved membership organization. Think about it in terms of a change in ownership. What is owned will continue to exist, and in this instance, continue to be maintained and evolved by the ISSB.

Q: Before our interview got underway, we talked briefly about a recent announcement from the gigantic Norwegian sovereign wealth about its intentions to become a signatory to the ISSB standards. Right now, you might say the ISSB has a captive audience of 140 regulatory jurisdictions who already subscribe to the IFRS financial and accounting disclosure regimen and who therefore are in line to consider at least adopting the ISSB standards. Is that what you anticipate?

Guillot: It’s truly hard to speculate along those lines. What I can say is that if you consider the strong support that IOSCO is lending to the ISSB mission, then that’s very positive. By the same token, I think that different markets will take different paths to adoption.

Q: My read is that the Japanese FSA (Financial Services Agency) actually could be among the first to embrace the ISSB baseline standards but that embrace could very well be piecemeal. At the same the leadership in Japan as well as President Biden, perhaps even at a forthcoming meeting, could well endorse the sustainability standard setting process in principle by stating their support for the wider dissemination of information that is material to investors.

Guillot: Yes, that would be very positive. It’s also where the rubber meets the road. It could influence whatever body has regulatory authority over corporate disclosure to side with setting sustainability disclosure standards. As you know, the shape of regulations varies around the world.

There are also big differences in what is mandated through corporate governance codes — or even suggested by way of corporate governance codes versus what's required under securities regulation. So it’s just a fact that we are going to have to look at it market by market to understand the path to adoption.

Q: Is there a historical perspective that’s instructive when we think about the trajectory of sustainability disclosure rules?

Guillot: Absolutely. It hasn’t been that long since regulators dealt with the challenge of converging the U.S. GAAP and the IFRS (International Financial Reporting Standards) and their two frameworks for financial reporting. That was some 20 years ago.

The challenge then — and now was that each framework reflected decades of work by whole ecosystems that supported the other’s use. That’s not the case with sustainability reporting. We can get to convergence in contrast to financial accounting, which is a much more mature practice, and consequently has more difficulty getting to global convergence. It’s why I think we can get to the global level early on without being held back by existing practices built on standards set long since country to country. There will be less resistance.

Q: From yet another direction, we’d like to know what motivates you. Is there a thread that runs through your experience to the current day?

Guillot: For so many years, I really had a traditional financial services career. I started out in accounting and moved into business in CFO roles and then COO roles in banking and asset management. Then I landed at CalPERS as the COO, and it was really at CalPERS where sustainability moved from being a personal passion to being something I wanted to focus on professionally.

I’ve always been passionate about agriculture and then sustainable or regenerative agriculture. I am interested in how we build sustainable food systems. It was that question that connected my personal passion to my work because CalPERS was a pension fund that thought about — and thinks about — very long term liabilities. CalPERS was in the forefront of thinking of itself as a universal owner — and how it will cover its liabilities over a 50-, 75-, 100-year time horizon.

If you are a long-term investor with such a long-time horizon, and you’re a universal owner that owns the entire market, how do sustainability issues impact your investment performance? At CalPERS, I led the fund’s development of its investment beliefs, which articulated very tangibly what the fund stands for.

Those beliefs still are on the CalPERS website, and they include ‘the big three’ or what we now would call sustainability-related investment beliefs. For example, one belief addresses long-term investment risk as multi-faceted, volatile and evolving over a very long time period — like climate change. This requires effective management of financial as well as human and financial capital.

We laid out these concepts, integrating them in our investment beliefs and then into our investment decision-making across our portfolio. We were a $300 billion fund at the time. Despite our size, we experienced real barriers to accomplishing these goals because the data and information we needed was scarce. I knew, especially since I came from COO roles, that if we really wanted to transform how investments are made, that we had to solve the data problem — because, as you know, investment processes run on data.

It was around the time that we were doing all this work on the investment beliefs that Jean Rogers was launching SASB in San Francisco. I thought it was a brilliant concept, namely to take the concepts having to do with accounting standards development and apply those to sustainability. Since I started my career as a technical accountant working in accounting policy, I knew what that meant and thought it was brilliant. I joined SASB to try to help bring that vision to life. I also knew that I would not be able to implement sustainability into investment decision-making at any kind of scale or cost-effective way until the data problem was solved. That was seven years ago, and that’s what led me onto this path where I am today.

• Read our 2020 Sustainability Stars’ interview with Jean Rogers, who was founding CEO of SASB at the time Guillot joined the organization.)

Q: And where did the interest in sustainability agriculture come from?

Guillot: Well, that’s hilarious! People are always asking me about how it happened that I got so interested in the food system and in foods, and I always answer that I’m an eater. I love to eat. I love high quality food. I like to cook. And I think we all have an interest in a sustainable food system because it will also lead to a safer world.