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RI Interview: FASB’s Marc Siegel and the All-Star Game of ESG reporting

How to integrate ESG into corporate financial disclosure

When Responsible Investor met with Marc Siegel this summer in Denver, at the annual conference of the Institute of Management Accountants, the TCFD was just about to release its final recommendations.

Siegel, a member of the Financial Accounting Standards Board (and before that with RiskMetrics), gave a keynote speech on Non-GAAP and ESG disclosures at the event.

He had warned the audience that as a former analyst who would dig into the footnotes of accounts in search of warning signs, there are ESG disclosures which are no-brainers regarding their impact on business valuations.

“Whether you are a responsible or a mainstream investor, everybody should care about that,” Siegel tells RI after his speech.

Siegel, a basketball enthusiast, is perhaps the closest FASB could have to a point guard with noticeable ball-handling skills when it comes to running the game of sustainability reporting in the US.

Asked to what extent he is interested in this area, he says: “I’m very interested in all the communications between companies and investors, and watching the interplay of what investors demand and what companies provide. That evolves over time.”

A milestone in that evolution of corporate reporting has been the Task Force on Climate-related Financial Disclosures (TCFD), and its goal of improving the quality of climate disclosure.

This requires, according to the TCFD, that the risks and opportunities of climate change be broadly integrated with financial statements.

How to put this into practice is quite a different matter, which presumably calls for the involvement of accounting standard-setting bodies such as the FASB and its global counterpart, the IASB.

Not in vain the TCFD highlighted the “interconnectivity of its recommendations with existing financial statement and disclosure requirements” such as IAS 36 (impairment of assets) and IAS 37 (provisions, contingent liabilities and contingent assets), which have a lot to do with the stranded assets theory.

So could this be the definitive signal for the FASB and the IASB to work on specific standards that embrace the financial reporting of climate change?

Siegel dodged past the question: “I’ll wait for the [TCFD’s] final recommendations.”

However, Siegel has expressed his personal opinion, more broadly, on whether FASB should have a role in sustainability disclosures. But the answer, as he puts it, is “not a simple yes or no”.

He explains that in some areas there is overlap between the boundaries of financial reporting and ESG. “Where there are assets and liabilities under our conceptual framework that also fall under the idea of E, S and G, we will have accounting and/or disclosures for it.”

One of those ESG overlaps Siegel refers to are environmental liabilities and asset retirement obligations (e.g. the clean-up of contaminated sites), specifically codified as FASB standards (link is broad. I’m not going to say that it is all in or all out, because environmental liabilities, to the extent that they are part of the past transaction or part of an asset retirement obligation, are already in.”

Another one, related to governance and executive compensation, is the accounting treatment of employee stock options as an expense, also codified as a standard.

Siegel admits: “We don’t have much about human capital, for example. Under FASB rules, when there is a restructuring of employees we would record that liability, but otherwise not much.”

Siegel has also admitted that the area of sustainability disclosures is becoming fragmented with a considerable number of players issuing voluntary guidance on what they think should be disclosed.

The Corporate Reporting Dialogue, a sort of All-Star Game of sustainability players, was set up in attempt to harmonize all these initiatives, among them here is a potential starting five: CDSB, SASB, GRI, IIRC and CDP.

The CRD, which is chaired by former Vice-Chairman of the IASB Ian Mackintosh, has published a Landscape Map, which according to Siegel, shows in an interactive way where those overlaps between standards occur.

“We are aware of all those efforts and we are at the table, we are observers in the Corporate Reporting Dialogue. But, again, our mandate is financial reporting.”

The question, therefore, is whether the mandate of the IASB and the FASB should be extended (as well as their resources) to cover non-financial reporting and thus put an end to any overlap in corporate reporting.

Not an easy task. In the case of the US, it reverts to the SEC, as by statue it has the responsibility for public company financial accounting, which the SEC outsources to the FASB.

Siegel adds: “The FASB only deals with financial statements and footnotes. The SEC deals with risk factors, management discussion and analysis, the proxy statement, governance. All those things are outside FASB’s purview.”

Siegel was asked about the TCFD more recently, at a SASB webinar entitled ‘How the Adoption of Financial Accounting Standards Informs Sustainability Disclosure’.

He just praised the TCFD disclosure recommendations, particularly their voluntary nature, and hoped for a broad adoption.

Siegel also noted that there has been a considerable increase in both voluntary and regulatory disclosures and wondered whether such demand is driven by investors or regulators.

“I always find that there is a tradeoff here between what information is provided because investors want it or because regulators require it,” he said.

In the latter case, Siegel continued, companies tend to respond much more “as a compliance exercise”. The information “might still be provided, but in a way that is a little bit more boilerplate, less communicative and helpful”.

Siegel’s comments underscore a perennial debate on whether this whole area of sustainability reporting should be compulsory or not.

Across the pond in London, the IASB has another ESG All-Star Game player in David Loweth, former Director for Trustee Activities of the IFRS Foundation, who has been working part time for the Foundation conducting research on wider corporate reporting.But so far, IASB Chairman Hans Hoogervorst has made it clear that developing mandatory sustainability reporting standards is not part of the debate.

As any spectator knows, you shouldn’t rely only on the goodwill of players to stick to the rules. So maybe someone will have to step in as a referee of ESG disclosures, if they are meant to be material.