When it comes to sustainability reporting, directors have been grappling with an array of different frameworks and acronyms for years. This may be set to change, writes AICD senior policy adviser David McElrea.
The alphabet soup of sustainability reporting organisations makes it difficult for directors to pin down which standards to use, let alone what to disclose — but change is in the wind.
The International Financial Reporting Standards (IFRS) Foundation — historically focused on the financial side — is pressing forward with a fast- moving, broad-reaching ambit towards a new international sustainability standards board. An announcement establishing the new board is possible as early as the UN Climate Change Conference (COP26) in November. But there are many challenges in realising this vision.
Over the past decade, environment, social and governance (ESG) issues have moved from the margins to the centre of the investment landscape. The game changer came in 2020, when Larry Fink, CEO of BlackRock, in his annual letter to chief executives, stated he would put sustainability at the heart of the world’s largest funds manager’s investments. Pundits were sceptical, but BlackRock followed up. For example, in 2020, they voted against the election of 62 different directors based on climate-related issues. Fink’s 2021 letter goes further in championing the virtues of sustainable investing. Alongside this trend is an increased focus from governments and regulators on non-financial outcomes, particularly on climate-related matters.
In this environment, attention is focused not only on how organisations manage their ESG, risks and opportunities, but how they disclose and report on them. The challenge entities face with ESG reporting and disclosure is the multitude of sometimes overlapping and competing frameworks — all with confusing acronyms.
Ainslie van Onselen, CEO of Chartered Accountants Australia and New Zealand (CA ANZ) says there are many different sustainability reporting frameworks in the non-financial reporting space, with each seeking to fill a specific gap. “The one currently getting the most attention is the Taskforce on Climate-related Financial Disclosures (TCFD) established by the G20 Financial Stability Board under [chair] Mark Carney,” says van Onselen. “There are also a number of standard setters such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). The International Integrated Reporting Framework from the International Integrated Reporting Council (IIRC) is also often included in these dialogues.”
With a proliferation of reporting frameworks, it can be difficult for boards and their entities to know which to use. Likewise, investors and stakeholders may struggle to interpret the disclosures or lack the ability to compare between entities. (see breakout).
Current non-financial frameworks and standard setting bodies include:
International Financial Reporting Standards Foundation (IFRS) This international NFP develops and maintains international accounting standards through the International Accounting Standards Board (IASB). In Australia, IASB standards tend to get adopted to form the Australian accounting standards, although subject to local modifications.Most countries use the IFRS accounting standards — not the US and China.
Global Reporting Initiative (GRI)
This Amsterdam-based organisation is responsible for the world’s most widely used standards for sustainability reporting. GRI standards help organisations understand and disclose their impacts in a consistent and credible way for multiple stakeholders.
Taskforce on Climate- related Financial Disclosures (TCFD)
Multi-stakeholder global taskforce established in 2015 by the Financial Stability Board to develop consistent and comparable climate-related financial risk disclosures. It is the recommended global climate-related financial disclosures standard. In Australia, it is referenced by regulators and standard setters. In line with the TCFD, NZ has announced mandatory climate risk reporting for large financial institutions.
International Integrated Reporting Council
(IIRC) A global coalition of regulators, investors, companies, accountants, academia and NGOs, established in 2010, which developed the International Integrated Reporting Framework. Integrated reporting communicates how an organisation creates value across a broad base of capitals. It is mandatory for listed entities in South Africa and Japan and has been referenced by ASIC and the ASX Corporate Governance Principles and Recommendations in Australia.
Sustainability Accounting Standards Board (SASB)
US-based standard setter founded in 2011 to guide the disclosure of financially material ESG information by companies to their investors. The standards are industry specific. SASB and the IIRC have recently announced their intention to merge to form the Value Reporting Foundation.
Climate Disclosure Standards Board (CDSB) has a framework for reporting environmental information with the same rigour as financial information. Initially focused on climate, the framework has been expanded to cover natural capital more broadly — including water and biodiversity. The CDSB is widely recognised by stock exchanges and the EU non- financial reporting directive.
Climate Disclosure Project (CDP) requests information from the world’s largest companies on behalf of more than 590 institutional investor signatories on climate, water and forestry. The companies can choose whether to respond. The CDP “scores” company responses to encourage greater leadership in this space.
International Sustainability Standards Board
The IFRS Foundation now proposes to develop an International Sustainability Standards Board (ISSB). This would work alongside the existing International Accounting Standards Board (IASB) to develop and maintain a global set of sustainability-reporting standards. A consultation paper was released by the IFRS Foundation in late 2020 and the AICD was one of over 500 organisations to make a submission with in-principle support of the proposal — on the basis that any framework developed would simplify the ESG reporting landscape and build on existing standards so entities weren’t required to replicate their work.
There was clear support for the proposal and IFRS has now begun the process of amending its constitution to create the new body. IFRS has indicated the ISSB would initially focus its efforts on climate-related reporting while also meeting the information needs of investors on other ESG matters. The ISSB will build on existing frameworks and consult with them on how they might be incorporated into any global standard. It will focus on issues relevant to investors and enterprise value.
In the US, a change of president has seen the White House announce a far-reaching plan for climate finance including altering capital flows and better definitions, measurement and reporting of climate impacts. In parallel, the US Securities and Exchange Commission is examining mandating climate disclosures.
In February, the International Organization of Securities Commissions (IOSCO), which includes ASIC, released a statement strongly supporting the ISSB. The statement said there was an urgent need for globally, consistent, comparable and reliable sustainability disclosure standards. It has since reported there is strong consensus for the ISSB.
Van Onselen believes IOSCO’s support for the Sustainability Standards Board is a potential game changer. “In 2000, IOSCO announced it had completed an assessment of the 30 accounting standards issued by what was then the International Accounting Standards Committee, declaring them fit for use by multinational listed companies worldwide,” she says. “Within five years, major jurisdictions including the EU, Australia and New Zealand had adopted the standards and now 144 jurisdictions use IFRS. IOSCO’s backing is critical to garnering confidence in sustainability reporting standards among regulators and capital markets.”
It is critical for the voices of Australian directors to be heard as this work progresses.
Perhaps sensing an impending risk to their mortality, five of the major framework and standard-setting institutions: IIRC, SASB, GRI, CDSB and CDP (see breakout) issued a statement setting out their intention to work together towards comprehensive corporate reporting. As part of their collaboration, this so-called “Group of Five”, then released a prototype climate-related financial disclosure standard, based on TCFD. The disclosure it envisages would be in addition to any climate-related financial disclosures that may already occur in the financial statements, such as on asset impairment or net asset values. This prototype provides a detailed template to enable an organisation to make consistent disclosures of how climate-related matters create or erode enterprise value.
It does this through a combination of narrative and specific disclosures. For example, the prototype calls for narrative disclosure on matters such as “board skills and competencies to govern and manage strategies designed to respond to climate- related risks and opportunities”. It also suggests more specific disclosures on items such as the current internal carbon price a firm uses or the range of prices used for assessing climate risks and making investment and strategic decisions, as well as metrics reflecting the impact of climate-related risks and opportunities on the entity’s financial performance. IFRS has acknowledged the Group of Five’s prototype and will consider it as the potential basis for the new board to develop climate-related reporting standards.
The establishment of an International Sustainability Standards Board has the potential to completely alter the way directors and boards would need to consider ESG matters by providing a single framework by which organisations report and are judged on their non-financial performance. While listed companies may need to use any future standards to make disclosures to markets and investors — unlisted companies and NFPs may find key stakeholders also demand similar public disclosure. There is a long way to go, though — the standards would have to be developed, released and adopted by jurisdictions around the globe, including Australia. But the prospect looks increasingly likely. Indeed, IOSCO is bullish and believes the first IFRS sustainability standard may be released as early as mid-2022.
According to van Onselen, changes to reporting and disclosure might drive different decision- making. “There is increasing recognition that the value of organisations is communicated through both financial and non-financial information.”
On the whole, a globally consistent and robust sustainability reporting framework is welcome given the multiplicity of current frameworks. As van Onselen says: “These developments in sustainability reporting are moving at a pace not normally seen in international standard setting. As Australia is typically a taker of international standards, it is critical for the voices of Australian directors to be heard as this work progresses.”
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