Sustainability standards seen as too fragmented

Environmental, social and governance reporting is filled with competing sets of sustainability-related standards that are in need of simplification and consolidation, according to accounting standard-setters and experts.

“What we need in the world of ESG is a convergence project,” said International Accounting Standards Board Chairman Hans Hoogervorst during an event in New York on Wednesday evening hosted by the IFRS Foundation and the CFA Institute. “ESG reporting is countless initiatives. I said in a speech there has to be consolidation among so many standard-setters.”

“I think it would be great if those standard-setters make the world a little bit simpler for users,” he added. “It’s too much now.”

Robert Pozen, a senior lecturer at the MIT Sloan School of Management who chaired the SEC’s Advisory Committee on Financial Reporting in 2007-2008, noted that there are at least 230 sustainability initiatives.

“Think about these companies that are trying to report under sustainability,” he said. “There are so many different groups here. The EU has followed, as they usually do, a principle-based approach, which has certain virtues, like allowing innovation, but it also leaves guidance pretty imprecise. If you look at the U.S., we have the Sustainability Accounting Standards Board, and they now have some pretty specific standards for 11 sectors and I believe 77 industries. But they are not the only ones. In the U.S., we have more acronyms than we know what to do with. Just to give you a sense, I looked them all up. There’s GRI (Global Reporting Initiative), TCFD (Task Force on Climate-related Financial Disclosures), CDSB (Climate Disclosure Standards Board), IIRC (International Integrated Reporting Council). You can hardly keep all these acronyms in your head, and each of them have somewhat different standards.”

He noted that he is a member of the advisory board of S&P, which has a new business doing ESG ratings. Its rival, Morningstar, also does ESG ratings. “Of course, each of these groups has their own standards,” Pozen added. “So the question is what is the appropriate role of FASB and IASB in this area? And I think it’s a very difficult question.”

He pointed out, however, that a new group, the Corporate Reporting Dialogue, has brought together a number of the other groups, and they now are working on coming up with a unified set of disclosure principles and recommended disclosures in climate-related issues. However, he added that he would like the Financial Accounting Standards Board and the IASB to act as the conveners to try to put together a coalition of the various groups and companies to try to come up with some standardized disclosures in some of the areas, or at least best practices, perhaps in the area of human capital.

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(left to right) CFA Institute managing director Kurt Schacht, IASB Chairman Hans Hoogervorst, Wall Street Journal columnist Jason Zweig, MIT Sloan senior lecturer Robert Pozen and FASB Chairman Russell Golden at an IFRS Foundation and CFA Institute event

FASB Chairman Russell Golden agreed with Pozen’s idea of trying to bring together the various standards, but not necessarily having FASB or the IASB be responsible.

“I think Bob is right,” he said. "What I’ve seen with my experience of standard-setters is when you have two groups and you’re trying to encourage them to get similar outcomes, communication is the way to do it. Bob’s point about convening is what I think is the right first step. They can talk about what they’re seeing. They can talk about the degree of identification. If not, why not? That to me is the first step. The first step is to agree they want to come together. Then, once they agree, then Bob will host the meeting.”

Hoogervorst is skeptical about the role of accounting standard-setters in sustainability reporting.

“It is a very difficult issue,” he said. “On the one hand, I think that most of us would agree that sustainability is a huge issue and a real problem. Is financial reporting going to tackle that problem? I don’t think so. It’s too big a problem for reporting to solve, and we should not have exaggerated expectations of it. There’s also a high degree of hype around the issue. There are lots of commercial interests. We have to be very careful, but I do think that what people remember and most like is the part of sustainability accounting reporting that is outward-looking.”

However, he warned of companies using sustainability claims as a cover for harmful practices. “That’s also where I feel that most greenwashing is taking place,” he added. “We don’t need sustainability reporting to know that the aviation industry has an environmental problem. What we need is proper pricing, and ESG reporting by Ryanair or American Airlines is not going to make a huge difference. What I do think is relevant for companies and for financial reporting is what do sustainability issues mean in terms of the future. There are standard-setters that specialize in that area, and I think those kinds of standards can provide useful information for investors.”

Hoogervorst noted that the IASB is working on updating what it calls the management commentary and practice statement, which is basically a guide to how to write an annual report. “It doesn’t say anything about sustainability issues at this moment, and we do need to pay attention to that,” he added. “We need to be able to tell companies, if you have sustainability issues and you think it may affect the future value of the company or even the current value of the company, that’s a big challenge. You should work on that, and there are standards that will provide information which is useful. We should stay within our scope of providing decision-useful information on financial matters to investors. We should not try to branch out into the question of what do companies do to save the earth.”

“Investors never think they have enough information, and issuers think there’s way too much,” said Kurt Schacht, managing director of advocacy at the CFA Institute, in introducing the discussion. “It’s too expensive. Quarterly reporting is too expensive. Nobody is paying attention to it, and is non-GAAP the cat’s meow, or is non-GAAP actually fake accounting?”

Wall Street Journal columnist Jason Zweig, who moderated the discussion between Hoogervorst and Golden, asked Golden whether the pressures faced by FASB are less than what the IASB faces overseas or just as strong.

“I think they are less here than what Hans talked about for a couple of reasons,” said Golden. “One is the scope of authority of FASB is less than what the IASB has. We only write standards for basically the audited financial statements of public companies, whereas you have a broader remit with the management commentary. I agree with what Bob Pozen said that accounting standard-setters should not be trying to drive management behavior. We should be writing standards that reflect management behavior. But I also agree with Bob that there are certain aspects of ESG that are important for investors to consider and understand because it will impact value and it will impact cash flow.”

Goodwill impairment and amortization and more

Kristen Sullivan, a partner at Deloitte who is also Americas region sustainability services leader at the firm and chairs the AICPA’s Sustainability Assurance and Advisory Task Force, recently met with Accounting Today to talk about sustainability issues.

“I think that the role that the accounting profession is increasingly playing, that we’ve seen a dramatic shift in corporate disclosure and how companies are communicating about risk and opportunity, and how ESG has really been defined under this universe,” she said. “No. 1, there’s an expectation for enhanced disclosure and we’ve seen tremendous growth. Eighty-six percent of the S&P 500 provide sustainability disclosure in some form, and investors continue to emphasize that they believe disclosure — ESG disclosure in particular — provides critical insight into how companies are thinking about risk and opportunity through expanding that aperture of risk and opportunity from a business consideration. But there’s still a disconnect in the market in terms of meaningful and decision useful and reliable disclosure.”

Last month, Deloitte issued a paper on sustainability disclosures going mainstream. “From our perspective, we believe that clearly the purpose of disclosure is to help companies communicate and meet the information needs of their stakeholders,” said Sullivan. “And as those expectations continue to change, where users are looking for more insight into when you think about climate risk, how is your business model vulnerable, and what are the dependencies you have in terms of physical as well as economic transition risks? How are you thinking about how management is considering a proxy for the broader universe of opportunities that can have disruptive impacts on the business?”

At the IFRS Foundation and CFA Institute event, Golden and Hoogervorst also discussed a number of other topics, including non-GAAP measures, proposals for changing goodwill impairment and amortization, and the idea of moving from quarterly to semiannual reporting. Neither of them favored semiannual reporting, but FASB is looking closely at changing goodwill impairment and amortization.

“At the FASB we recently put out an invitation to comment, and what that document does it describes the financial reporting problem that the board has observed,” said Golden. “It describes multiple perspectives and really asks our stakeholders to weigh in. We got almost a hundred comment letters. Right now we’re gearing up toward a public discussion of the pros and cons of amortizing goodwill. I would say the majority of the board at the FASB would prefer to reinstitute the amortization of goodwill. If you like amortization of goodwill, that’s the good news. The fact is that we don’t exactly have an agreement on how to do that at this time.”

Different board members favor different approaches, and Golden doesn’t want to have another area where FASB and the IASB fall out of alignment.

“One of the situations we have in the U.S. is we allow private companies to amortize goodwill over 10 years,” he added. “And we have a commitment to keep converged standards. So it’s a very difficult challenge for the board. Do we want to converge the U.S. system and have public and private amortized over 10 years and risk deconverging from the international group, or do we want to work with the international counterparts and see if we can come to a global solution? I think the invitation to comment has helped us to better understand the advantages of amortization. We’ll have international participants at our roundtable. We hope that we can work with the international community to come to a solution that is converged.”

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