Sustainability groups come together on prototypes of disclosure standards

Five organizations that provide different standards and frameworks for sustainability reporting released prototypes Friday of climate-related financial disclosure standards to illustrate how they could work within their various approaches.

The five groups — the Sustainability Accounting Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council, the Carbon Disclosure Project, and the Climate Disclosure Standards Board — have come under pressure from international securities regulators to smooth out the differences between their various standards and frameworks for environmental, social and governance reporting as ESG investing has grown in popularity and acceptance.

In September, the five of them pledged to work together on harmonizing their systems (see story). SASB and the IIRC also announced plans last month to merge together by the middle of next year and rename themselves the Value Reporting Foundation, and the CDSB has signaled its interest in joining them (see story).

The International Financial Reporting Standards Foundation, which oversees the International Accounting Standards Board, also issued a consultation paper about a proposal to create an international sustainability standards board, which would function alongside the IASB. SASB and GRI have both responded positively to the proposal, as has the International Federation of Accountants, whose CEO, Kevin Dancey, floated the idea in September. On Friday, Institute of Management Accountants president and CEO Jeff Thomson, told Accounting Today he is sending a comment letter from IMA that supports the proposal as well.

Since SASB, GRI, IIRC, CDP and CDSB published their joint statement of intent in September, the group of five wrote an open letter to Erik Thedéen, chair of the International Organization of Securities Commissions’ Sustainable Finance Task Force, to reiterate their shared commitment to contribute to the achievement of a globally accepted comprehensive corporate reporting system. In response, Thedéen welcomed the consultation by the IFRS Foundation trustees about possible ways the foundation could contribute to this development, by broadening its current mission beyond the development of financial reporting standards.

The paper issued Friday by the five groups aims to show how standard-setting for sustainability-related financial disclosure would be a natural extension of the IFRS Foundation’s current role and within its existing remit, and offers some insights into how such an ambition could be achieved by building on content that already exists. It also illustrates this idea in the form of prototypes to serve as a running start for any standards development that a new standards board under the IFRS Foundation might undertake.

In the paper, the five organizations explain why enterprise value reporting — in other words, disclosure of how sustainability matters create or erode enterprise value — “is not therefore a replacement for sustainability reporting, which serves a broad range of stakeholders, can offer input to public policy design and reveals issues that may emerge as material for economic decision-making over time.”

The report contends that consistent communication of how sustainability issues affect drivers of enterprise value can be a “complementary enabler of change, since it creates a financial incentive for companies and their investors to improve performance on some sustainability matters as much and as quickly as they can.”

The report may provide a way to bridge some of the gaps between financial and sustainability reporting.

“A new corporate reporting regime is needed in which financial and sustainability reporting is given equal footing,” said GRI chairman Eric Hespenheide in a statement. “Achieving this will require strengthening the current financial standards to accurately consider the positive and negative implications of sustainability issues on a company’s financial health, as well as acknowledging the crucial role of the private sector in addressing global challenges. The report launched today illustrates how this could be done. Furthermore, we believe that improved depth and quality of corporate reporting can only be realized when financial and sustainability reporting are both mandated. GRI’s vision is of a sustainable future that is supported by global sustainability reporting standards, which inform all stakeholders — from investors through to civil society, policy makers, labor unions and others.”

IIRC CEO Charles Tilley believes the paper offers an approach to how the groups can meet the demands of their stakeholders. “This unified approach and illustrative prototype climate-related disclosure standard demonstrates that a global structure can be achieved to a rigor, and within a timeframe, that meets stakeholder demands,” he said in a statement. “Standards for enterprise value creation connect relevant societal and environmental factors to core business and capital market decisions, accelerating progress towards long-term sustainable value creation. Our frameworks and standards are designed to be decision-useful and I look forward to the market's response to this collective global effort as a stepping stone toward comprehensive value creation and to bring future cohesion and simplicity to the corporate reporting system.”

IFAC issued a statement Friday applauding the report, saying it “not only provides a valuable starting point for this IFRS initiative, but also clearly demonstrates the collaborative intent and effort of these organizations — now and going forward.”

IFAC is encouraging its members and stakeholders to respond to the IFRS consultation paper by Dec. 31. One of IFAC’s members, the IMA, is sending a comment letter in support of having the IFRS Foundation oversee an international sustainability standards board.

“I think 2021 is going to be a seminal year for sustainability accounting and sustainability accounting,” said IMA president and CEO Jeff Thomson. “IMA has just submitted two letters, one to the IFRS Foundation on calls for a new sustainability accounting board. We are very much at the forefront of that. The IFRS Foundation has called for the creation of a new sustainability standards board sitting alongside the IASB. The SASB and the IIRC have announced their intentions to merge in mid-2021. I think IMA has been very much at the forefront of integrated reporting, and the movement toward a more balanced approach toward value creation and the role of the CFO in industry. In fact, that is at the very heart of management accounting. It’s not just short-term financial reporting. It’s more like holistic performance reporting.”