Pooling accounting resources to achieve mainstream ESG integration

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During recent Climate Week NYC meetings in September, it was highlighted that not enough is being done in the accounting world to combat climate change.

Rather than “counting the deckchairs” on the Titanic, in the words of Rodney Irwin, managing director of redefining value and education at the World Business Council for Sustainable Development, it is now time for the accounting community to accept that environmental, social and governance disclosure can no longer be marginalized as "non-financial" reporting.

ESG disclosure urgently has to become part of mainstream reporting to enable companies and investors to navigate a more sustainable pathway, away from catastrophic climate change, ecosystem collapse and the unprecedented market failures that they represent.

As the International Accounting Standards Board Chairman, Hans Hoogervorst announced in a speech earlier this year, the IASB plans to incorporate intangibles into its Management Commentary Practice Statement; however it does not have the expertise to enter the field of ESG reporting directly.

In his speech, Hoogervorst advocated sustainability reporting standards that focus on the investor and on the impact of sustainability issues on the future returns of the company. He also commented that there are currently “simply too many standards and initiatives in the space of sustainability reporting,” which “leads to a lot of confusion among users and companies themselves.”

As a global accounting community, we need to address the current confusion as well as the information and skills gaps around climate and other ESG reporting and work together to create a robust corporate reporting system that incorporates ESG disclosure and is properly regulated and audited for authenticity.

Mainstreaming climate disclosure

The Corporate Reporting Dialogue’s Better Alignment Project, a coalition of major global sustainability-related standards and frameworks, recently released a report for businesses and investors to use as a practical guide in understanding and implementing the Task Force on Climate-related Financial Disclosures recommendations using their well-established reporting frameworks.

Initiatives like this create the groundwork to integrate ESG and “financial” reporting. It makes sense for accounting frameworks to continue to pool their resources and expertise globally to find solutions to both bridge this current accounting gap and tackle confusion in the reporting landscape.

Through the Better Alignment Project, the top five global sustainability-related reporting frameworks worked together to collectively strengthen the corporate reporting system.

As part of the Better Alignment Project, CDP, the Climate Disclosure Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council and the Sustainability Accounting Standards Board collaborated intensively to assess alignment on the TCFD’s disclosure principles, recommended disclosures and illustrative example metrics.

Entitled “Driving Alignment in Climate-related Reporting,” the publication maps the Better Alignment Project participants’ standards and frameworks against the seven principles for effective disclosure, the 11 recommended disclosures and 50 illustrative example metrics detailed in the TCFD recommendations. It also documents the commonalities and differences between the Dialogue participants within the parameters of the TCFD recommendations’ example metrics.

The mapping showed strong alignment between the participants’ frameworks and standards and the TCFD recommendations, specifically:

• The TCFD’s seven principles for effective disclosure are harmonious and complementary with those of the participants’ frameworks and standards, with the mapping showing no sources of conflict.

• The participants are well-aligned with the TCFD’s 11 recommended disclosures, each of which is comprehensively covered by the frameworks and standards.

• Overall, 80 percent of the TCFD’s 50 illustrative metrics are fully or reasonably covered by CDP, GRI and SASB indicators.

• There are high levels of alignment between CDP, GRI and SASB for the TCFD’s illustrative example metrics, with 70 percent of the TCFD’s 50 metrics showing no substantive difference between the participants’ indicators. For the remaining 15 indicators, substantive differences are limited.

During our technical work on the TCFD recommendations, we were surprised to find out how much the participant frameworks had in common. They were all aligned on the TCFD disclosure principles and highly aligned on the TCFD example metrics.

We found much common ground between the frameworks, despite their different usage of language and terminology.

Progress via collaboration

The Better Alignment Project was not the first time we had found commonalities between reporting frameworks.

Other collaborative work by the Corporate Reporting Dialogue has also found common principles between the IASB, the International Organization for Standardization and the global sustainability-related reporting frameworks.

Our “Understanding the Value of Transparency and Accountability” report, published in July, set out seven principles of transparency and accountability that these frameworks commonly believe are fundamental to corporate reporting: materiality, completeness, accuracy, balance, clarity, comparability and reliability.

The frameworks also commonly identified transparency and accountability as critical to achieving high-quality governance mechanisms and empowerment of stakeholders in modern societies and markets, as well as enabling better decision-making by market parties and serving the public good.

Once again, when we moved past differences in language and terminology, we found common ground.

Challenging accounting-as-usual

The accounting profession is responsible for maintaining trust in the global economy, and it needs to remain fit for purpose in the modern world. If we are to change the way we do business, that means also changing the way we account for businesses. Joined-up accounting is needed so companies and investors can start to embrace joined-up thinking and take ESG issues out of silos and into the heart of their operations.

Instead of “counting the deckchairs,” we need to factor real-world problems into our mainstream accounting systems and thereby fix the faulty navigation system. If we cannot carry on with business as usual, we also cannot carry on with accounting as usual.

Through our Better Alignment Project report, the Corporate Reporting Dialogue has made some progress toward updating the accounting process, but much more needs to be done to make our accounting systems truly fit for purpose.

However, the Better Alignment Project has taught us an important lesson — accounting frameworks can work together to strengthen the corporate reporting system. I hope this is a lesson that the accounting world will take forward to inform vital changes in the future.

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