A group of international sustainability accounting standard-setters — including the Carbon Disclosure Project, the Climate Disclosure Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council and the Sustainability Accounting Standards Board — released a shared vision Friday of the elements needed for more comprehensive corporate reporting and a joint statement of intent to drive toward such a goal, as confusion over the sometimes conflicting sets of standards threatens to impede progress.
In the document released Friday, the groups pledged to work together and committed to engaging with key organizations, including the International Organization of Securities Commissions, the International Financial Reporting Standards Foundation, the European Commission and the World Economic Forum’s International Business Council. They are also being encouraged by the International Federation of Accountants to work together under the auspices of the IFRS Foundation, alongside the International Accounting Standards Board, which is also overseen by the IFRS Foundation.
GRI, SASB, CDP and CDSB set the frameworks and standards for sustainability disclosure, including climate-related reporting, along with recommendations from the Task Force on Climate-related Financial Disclosures. The IIRC provides an integrated reporting framework to link sustainability disclosures to reporting on financial reporting and other matters. Altogether, the organizations guide the overwhelming majority of sustainability and integrated reporting throughout the world.
“CDP, the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) have co-published a shared vision of the elements necessary for more comprehensive corporate reporting and a joint statement of intent to drive toward this goal – by working together and by each committing to engage with key actors, including IOSCO and the IFRS, the European Commission, and the World Economic Forum’s International Business Council,” said CDSB managing director Mardi McBrien in a statement.
The groups plan to provide joint market guidance on how their frameworks and standards can be applied in a complementary and additive way; along with a joint vision of how these elements could complement financial GAAP and serve as a natural starting point for progress towards a more coherent, comprehensive corporate reporting system. In the document, they made a joint commitment to drive toward this goal, through an ongoing program of deeper collaboration between them, and a stated willingness to engage closely with other interested stakeholders.
Several of the groups have been working for several years to harmonize their standards as part of an effort called the Corporate Reporting Dialogue, spearheaded by the IIRC, but they still have been operating separately, concentrating on various aspects of sustainability, human capital, governance and other non-financial reporting issues. The groups are coming under increasing pressure to come up with a more unified set of standards for environmental social and governance reporting, however.
Earlier this week, IOSCO Secretary-General Paul Andrews suggested the multitude of choices for ESG reporting gave companies too much leeway in deciding what to report and made it difficult to compare ESG disclosures from different companies, according to the Financial Times, That makes it difficult for investors as there’s “no common definition of what a sustainable finance product is.” He said IOSCO would create a task force to translate the different standards into a more cohesive, transparent and standardized form, according to the FT, as well as investigate “greenwashing” by asset managers and look into the growing role of credit-rating agencies and investment index providers in providing ESG ratings.
The new effort by the existing standard-setters may help meet some of these demands, and come against the backdrop of the COVID-19 pandemic, which has been having an impact worldwide.
“This year we have witnessed businesses around the world having to pivot their business models overnight, to prioritize the health and safety of their employees and customers above the immediate financial success of the business,” said IIRC CEO Charles Tilley in a statement. “The connectivity between sustainability-related factors and immediate financial-viability is clearer than ever before. It is why we are committed to working with our partners to drive a holistic system for reporting across the value chain. We know that businesses globally are already using a mixture of our frameworks and standards to provide stakeholders with robust, effective information to drive better decision-making and capital allocation via their integrated report. This document provides further clarity on how to do this effectively.”
IFAC is calling for the creation of an International Sustainability Standards Board alongside the International Accounting Standards Board, under the auspices of the IFRS Foundation. The proposed board would address growing demands from investors, policy makers and regulators for a reporting system that delivers consistent, comparable, reliable and assurable sustainability information.
“The time for a global solution is now,” said IFAC CEO Kevin Dancey in a statement. “Given the momentum that has developed this year — because of work by Accountancy Europe, WEF/IBC, the European Commission, the IOSCO Task Force and the five leading reporting initiatives — we have a unique opportunity to act in concert to do the right thing in the public interest. IFAC believes the IFRS Foundation, with the backing of public authorities, is optimally positioned to lead and coordinate this initiative, and they would do so with our full support. We recommend that the proposed board adopt a “building blocks” approach, working with and leveraging the expertise and disclosure requirements of the CDP, CDSB, GRI, IIRC and SASB.”
American Institute of CPAs president and CEO Barry Melancon, who also chairs the IIRC, is supporting that suggestion as well. “IFAC’s recommendations are powerful, coming out at a time when the world is in search of answers,” he said in a statement. “This is an important moment for the IFRS trustees, as businesses and investors need robust and trusted standards and interconnected oversight. A cohesive approach to reporting is not just more efficient, it is essential to unlock the positive force of value creation. We also need innovation to complete the corporate reporting system, to ensure we have an assurance process that is fit for purpose and the technology to support high quality reporting and governance.”
There are reasons why the various sets of standards and frameworks have evolved separately, however. Users of sustainability disclosures have different needs, which sustainability disclosure standards are supposed to facilitate. Along with understanding the impacts on society and the environment associated with an organization’s activities, many users need to understand how such issues affect an organization’s financial performance and long-term value creation.
SASB supports the effort to coordinate more closely with its fellow standard-setters. “SASB’s unique role in this system is to surface the subset of environmental, social, and governance issues reasonably likely to materially impact financial performance of the typical company in each of 77 industries,” said SASB CEO Janine Guillot in a statement. “SASB standards are designed to improve the quality and comparability of a core subset of financially material sustainability information, serving as an important complement to information that is already reflected in the financial accounts according to financial GAAP.”
The Global Reporting Initiative also indicated its support for the joint effort. “As GRI, we believe strongly in a vision of a single, coherent global set of reporting standards,” said GRI chair Eric Hespenheide in a statement. “That is why we are pursuing collaboration with these other organizations. We have called on all of them to join in the development of a pragmatic approach to joint standard setting along with fundraising to support such an effort. This would underpin the unique contribution and specific focus of each partner organization.”
The standard-setters plan to use structured information such as a taxonomy, to make comparisons, and the information would be “democratized” through a public data platform, as the Carbon Disclosure Project provides for thousands of companies.“We are delighted to work with these peer organizations to develop this statement,” said CDP CEO Paul Simpson in a statement. “Over the past 20 years at CDP, we have seen environmental disclosure move from being almost non-existent to fully mainstream. The 8,400 companies, representing over 50 percent of global market capitalisation, who disclosed through our platform last year demonstrate this and provide a structured data set to the market. With the world’s largest corporate environmental disclosure repository, CDP is uniquely placed to showcase which data points align with which standards and taxonomies, and to continue to help companies, cities, states and regions to measure their environmental risks, opportunities and progress.”
The Center for Audit Quality sees value in having a common framework for ESG reporting for investors and auditors to compare. “Investors are clear — ESG information is increasingly relevant to their decision-making,” said CAQ executive director Julie Bell Lindsay in a statement. “Auditors remain dedicated to preserving public trust in the capital markets through the flow of reliable information for decision-making. We applaud the leading framework and standard-setting organizations for coming together with a joint vision toward a more consistent system for ESG reporting. A globally accepted system built from existing standards and frameworks, adapted to market needs, could help ensure companies put forth readily comparable ESG information. Further, the financial reporting process that has long underpinned our capital markets serves as a model, providing a path forward for ESG reporting with greater comparability and reliability.”
The CAQ pointed to the challenge right now of determining what types of ESG information to report and how to communicate it within a landscape of multiple frameworks and standards. A globally accepted system would build from those existing standards and frameworks, and by adapting to market needs, help ensure companies issue readily comparable ESG information.
Some accounting firms have been getting heavily involved in providing sustainability services and assurance to clients, and having a common set of standards could help with this endeavor.
“Transparent measurement and disclosure of sustainability performance is a fundamental part of effective business management and is essential for preserving trust in business as a force for good,” Veronica Poole, global IFRS leader and head of corporate reporting at Deloitte, said in a statement. “IFAC’s vision is fully aligned with the joint vision of the leading standard-setters on how their current standards and frameworks could complement IFRS standards and U.S. GAAP, and serve as a natural starting point for progress towards a more coherent, comprehensive corporate reporting system. We now have a unique opportunity to accelerate progress and house all the relevant standards under one roof as suggested by IFAC, to connect sustainability disclosure standards focused on enterprise value creation to financial GAAP.”
She sees an opportunity to link together the various standards and frameworks. “Integrated reporting together with the IASB’s work on management commentary can provide a framework for this connectivity,” Poole added. “IOSCO has stated its commitment to bring about the system change for the capital markets and the IFRS Foundation trustees indicated that they are going to consult on introducing a sustainability focused standard-setter under the umbrella of the IFRS Foundation — the stars are lining up to bring about the fundamental shift in reporting that investors, business and society at large have been calling for.”
