ESG disclosures will be addressed by the International Accounting Standards Board (IASB), although only as part of its ongoing project to update the guidance for management commentary, the narrative reporting that provides additional context to understand companies’ financial statements.
The IASB convened its consultative group last week to discuss the scope and principles of the new Management Commentary Practice Statement, first issued in 2010.
The IASB has made it clear that its role remains pure financial reporting as opposed to “wider corporate reporting” under which it places ESG reporting.
There is an overlapping area, dubbed by the IASB as “broader financial reporting”, in which the standard-setting body says it can cover with new guidance on management commentary.
“Lots of people get nervous when the IASB starts talking about this role in wider corporate reporting. For instance, most members of our Advisory Council told us ‘please stick to your guns’ which is financial reporting,” Hans Hoogervorst, IASB Chairman, said at the meeting.
Hoogervorst said that the Practice Statement needs to be updated, among other reasons, due to new developments in wider corporate reporting such as the Integrated Reporting Framework and the Taskforce on Climate-related Financial Disclosures (the IASB is an ex-officio member of the Financial Stability Board, which houses the TCFD).
Members of the consultative group raised different issues such as consistency, verifiability or materiality of the management commentary.
Vincent Papa, Associate Director at the European Financial Reporting Advisory Group, said: “It would be helpful to provide some clarity on what falls under ‘broader financial reporting’”. He mentioned that there are various investor-oriented initiatives, such the Sustainability Accounting Standards Board (SASB) and the TCFD, which could be used as a reference point.
Massimo Romano, Head of Group Integrated Reporting at Italian insurer Generali, said: “In Europe there is a great curiosity about the IASB’s position in this area. If this cannot be used to disclose the Non-Financial Reporting Directive [obligations], you should say it.”
Ben Yeoh, Senior Portfolio Manager at RBC Global Asset Management, said that a level of verifiability in the management commentary would be helpful, “otherwise I’ll be checking it from third party sources”.Marek Grabowski, member of the International Auditing and Assurance Standards Board (IAASB), which issues the International Standards on Auditing, said assurance work is currently being developed in this field.
Kris Peach, Chair of the Australian Accounting Standards Board, said that it would be a missed opportunity not to consider auditing the management commentary.
She added that it is a “fundamentally important piece of information” and that if accountants don’t get it right they will “left out” regarding the future of reporting.
Together with other members of the consultative group, Andreas Barckow, President of the Accounting Standards Committee of Germany, suggested that the nature of the management commentary should be made mandatory eventually.
Meanwhile, a group of academics and investors with $5 trillion AUM have called on the SEC to issue rules on ESG disclosures.
Among the co-signatories of a letter sent to the SEC are faith investors, CalPERS, New York State Comptroller Thomas DiNapoli, Illinois State Treasurer Michael Frerichs, Connecticut State Treasurer Denise Nappier, Oregon State Treasurer Tobias Read, and the U.N. Principles for Responsible Investment.
In June, at the Institute of Management Accountants’ Annual Conference in Indianapolis, RI asked SEC’s Chief Accountant Wesley Bricker about the regulator’s approach to sustainability reporting.
In particular RI asked whether the Financial Accounting Standards Board should be given a broader mandate to set sustainability reporting standards.
Speaking in a personal capacity, Bricker told RI that general purpose financial reporting and special purpose financial reporting should be kept “distinct without merging the two”.
Bricker argued that the Management Discussions and Analysis (MD&A) section of 10-K filings is the right context, within the general purpose financial reporting framework, to include sustainability disclosures.
“We require, and have required for longer than any other securities regulator, the disclosure of material risks and uncertainties that impact the investment decisions. So, the sustainability question has been a question for the SEC since the late seventies.”