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In their Green Paper Richard Barker and Robert Eccles claim to contribute, in a “neutral way”, to the ongoing debate on sustainability reporting standards and who should set them.
We are not neutral. We believe that sustainable development issues are urgent, complex and that they present an existential threat to people and planet. Unless they are addressed, no one will be around to make investment returns.
But Barker and Eccles are not neutral either, despite the paper’s claims. This matters because it has been used by the IFRS Foundation Trustees to inform their Consultation Paper on Sustainability Reporting. Their very title Should FASB and the IASB be responsible for setting standards of nonfinancial information? is laden with assumptions and judgements. The possibility of the Global Reporting Initiative (the longest standing and by far the most used offering) continuing to do so, with its standards becoming mandatory, is not a proposition to be entertained.
The title treats sustainability reporting as a mere subset of ‘non-financial’ reporting aimed at investors, not, as we see it, the disclosure of environmental, social and economic impacts, or impacts on sustainable development, and the organisation’s approach, strategy and governance oversight in order to be able to ascertain whether those impacts are observed, managed, addressed and monitored.
Barker and Eccles list the pros as being the expertise of FASB and the IASB “in setting standards for information on company performance used by investors” and their being an “obvious place to start, because they are the monopoly providers of corporate financial reporting standards.” We think these are cons.
What information do investors need?
In addressing the question “how best to ensure that the capital markets have the non-financial information they need to function properly” Barker and Eccles privilege investors. But which investors? Not people like us paying into pensions. We want long term returns and to leave the planet better than we found it for the social and economic well-being of the next generation.
Investors are not homogenous. On the one hand there are the mega asset managers still investing in fossil fuels, seeking not to draw too much attention to these activities whilst minimising the costs of doing any kind of assessment of the impacts of the investments they make. Then there are the impact investors seeking to earn strong returns and make a positive impact on sustainable development. The former probably know that physical climate change risks, pandemics, poverty and inequality have the potential to lead to civil unrest in some jurisdictions and a potentially material effect on their returns but choose to ignore it. But would these be picked up in the standards for investors that Barker and Eccles propose?
What would be in these standards?
Barker and Eccles argue that a standard must be “discriminating and prescriptive” and that “it must be possible to demonstrate whether or not [it] has been met.” We need a different mindset for sustainability reporting. Being discriminating and prescriptive in sustainability reporting (as the SASB is) might follow a desire to simplify complex, interdependent sustainable development issues and reduce costs. It might also be a convenient way of justifying the inclusion of some issues and not others. If standards only include disclosures that are “discriminating and prescriptive”, elaborate attempts to put a monetary value on sustainable development risks, opportunities and impacts will follow. More work for the (possibly fairly large) sub-set of accountants who think that the only unit for accounting and reporting has a yen, dollar or euro sign in front of it.
Indeed Barker and Eccles bemoan that: “The picture is complicated […] by the call for non-financial reporting to be concerned with both dependency and impact, and with capturing materiality for a range of stakeholders, in order to report on materiality to shareholders. Financial reporting, in contrast, is far less demanding in its core purpose and scope” (our emphasis). This really begs the question as to why the authors even considered FASB and the IASB, or IFRS Foundation, as a suitable body to such sustainability reporting standards.
Integrating, extending and adding the “non” to the “financial” is not enough. Metrics are limited in their capacity to capture the broader, qualitative and often more relevant picture. Meeting numerical targets and ticking off on a disclosure checklist, while “hiding” the actual poor performance through an inadequate management approach to materiality and robust governance oversight (because they are not required to be disclosed in “discriminating and prescriptive” standards) is not enough. In fact, it will likely do more harm than good.
So, what needs to happen?
Investors, whether they know it or not, or want to hear it or not, need information on their impacts on sustainability development and management approach to identify impacts, risks and opportunities, incorporating them into strategy and governance oversight of all this.
In a recent Harvard Business Review article, Barker and Eccles with George Serafeim note “we have a large number of NGOs working… to develop standards for sustainability reporting” but fail to highlight there is really only one (GRI’s Global Sustainability Standards Board, GSSB) that has got global traction and that stands head and shoulders above the others in usage as reported in the most recent KPMG (2020) survey. This information would not support their call for the IFRS Foundation to establish a Sustainability Standards Board alongside the IASB.
Our view is that, rather than starting from scratch, efforts should focus on making the GRI’s GSSB Standards mandatory so that investors have information on sustainable development impacts. The IASB should recruit skills, or work with the Value Reporting Foundation, to ensure IFRS statements and guidance incorporate the sustainable development impacts on asset valuations and liabilities are reflected in financial statements. The IASB’s Management Commentary could incorporate the IIRC’s integrated reporting framework with explicit reference to sustainable development.
Prioritising mandating a set of sustainability standards, taking what Barker and Eccles refer to as an ‘investor perspective’ would be a backward step. The very information that investors do need (about sustainable development impacts, risks and opportunities) would take second fiddle.
Carol Adams is a Professor of Accounting at Durham University Business School, UK and Swinburne Business School, Australia. She is Founding Editor and Editor-in-Chief of the Sustainability Accounting, Management and Policy Journal. She is immediate past Chair of the GRI Stakeholder Council.
Charles H. Cho is a Professor of Accounting and the Erivan K. Haub Chair in Business & Sustainability at the Schulich School of Business, York University, Canada. He is Editor of Accounting Forum and Accounting and Business Ethics Section Co-Editor of the Journal of Business Ethics.