Convergence on sustainability reporting standards
Climate matters have never been more important, but inconsistent sustainability reporting standards are holding back progress in the corporate world, the International Federation of Accountants (IFAC) has said.
The absence of a globally agreed set of green standards has long been a bone of contention for accounting sector watchdogs, with concerns that too many fragmented reporting frameworks are emerging in that vacuum. There are at least eight different sustainability reporting initiatives, all with their own acronyms, currently in operation.
“These multiple frameworks can be confusing for preparers of corporate reports but there are now signs of some convergence,” said Anthony Appleton, partner at BDO London.
Efforts to cut through the alphabet soup are at pace, with the IFAC’s suggestion of a new standards board that will bring the ecosystem of financial and non-financial sustainable reporting requirements together under one roof.
“This approach offers the quickest and most effective route to a baseline of internationally consistent sustainability-related disclosures for enterprise value creation developed in the public interest,” the IFAC said, calling for international collaboration with other regulators “to make this initiative a success”.
Despite sharing a common goal, the current frameworks are all markedly different. For example, each one diverges in how it defines “materiality” for a business. In one standard, “materiality” is outward looking and refers to “the impacts of the company on the world around it”. Whereas in another standard “materiality” concerns the impacts of sustainability topics on a company’s financial condition or operating performance, which is more inward-looking.
Deloitte’s most recent Climate Check report found sentiment to act on climate issues remains strong within the corporate world. While the pandemic has slowed progress, businesses are eager to push ahead with environmental sustainability actions as they feel the action of not doing so.
The impression amongst business is that governments and regulators can do more to address the challenge and increase sustainability efforts by prioritizing strategies - which includes an agreement on reporting standards.
Regulatory and political uncertainty emerged as a top climate issue facing businesses, according to the report. “Investors and companies both recognise the lack of a common, consistent way to measure and report on key Environmental, Social, and Governance (ESG) issues,” Deloitte said. “Standard setters, accountants, and various industry and regulatory bodies are actively collaborating to support the creation of a single, globally accepted system of environmental sustainability reporting.”
To begin, a working group announced by the Trustees of the International Financial Reporting Standards Foundation will soon begin the technical preparation to converge sustainability reporting standards under the governance of the IFRS Foundation. It will provide technical recommendations and develop standards for climate-related reporting and other sustainability topics.
“As companies become more aware of the need to address ESG issues, and stakeholder demand for it, there now seems to be a need for accountability and a global set of internationally recognised standards to match,” said Mark Vaessen, chair of KPMG Better Business Reporting network.