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IFRS proposes sustainability reporting standards

Richard Murphy explains why the proposed Sustainability Standards Board (SSB) should be of interest to all accountants, whether they have a green tinge or not.

24th Nov 2020
Founder and blogger Tax Research UK
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Climate change
istock_climatechange_Everett Atlas

For many AccountingWEB readers, what the International Financial Reporting Standard Foundation (IFRS) has to say might not be terribly relevant. The vast majority of accounts that they produce are based upon the various versions of UK financial reporting standards. However, wherever the IFRS leads, UK GAAP tends to follow, and as a result its proposal to create a Sustainability Standards Board (SSB) should be of interest to all accountants, whether they have a green tinge or not.

The IFRS proposal is not about news standards, as such, at least as yet. What the IFRS has instead noted is that around the world a whole rash of sustainability reporting standards are being promoted, all intended to serve the needs of ESG (environmental, social and governance) reporting, which is now of importance with almost all institutional investors. There is Mark Carney’s TCFD (Task Force on Climate-related Financial Disclosures), the GRI (Global Reporting Initiative), the SASB (Sustainability Accounting Standards Board), and an EU initiative, as well as more besides, all competing for attention in this space. And if you are not already acronymed out, the IFRS wants to potentially build on all these with the launch of its own SSB, which will partner, but not be a part of the IASB (International Accounting Standards Board) that it already runs.

So what would this body do? The aim would be to produce sustainability reports, but outside the framework of financial accounting. The proposed structure makes it clear that the IASB thinks that the world is split like this:

Financial and sustainability reporting diagram

It’s as if they believe that climate exists beyond the world of finance. That is an opinion only reinforced by the fact that they suggest that the stakeholders for this new data might be:

  1. Investors
  2. The corporate sector
  3. Central banks
  4. Market regulators
  5. Public policy makers
  6. Auditing firms and other service providers

They ignore the fact that there are other stakeholders in society at large who think that both issues are a subset of their wider, and related, concerns. The IFRS worldview should, I suggest, look like this, where the outer ellipse represents society at large:


Financial and sustainability reporting diagram


Most of the existing sustainability standards that the IFRS refers to, and which I have noted, have perforce had to see the world in this way to date. That is because the IFRS have refused until now to countenance sustainability reporting within financial reporting, and the two have as a result been kept far apart. Sustainability reporting has had to exist outside the financial accounting framework as a result, even though ESG investors see them as inter-related. That is because ESG investment managers know that they have a wider stakeholder community than the IFRS recognises, including in addition to those the IFRS notes:

  1. Trading partners
  2. Employees
  3. Civil society

Or, to put it another way, most especially with regard to the last two, ESG reporting recognises the existence of many of the people to whom financial statements are really relevant as they are its real end consumers.

Despite this, the IFRS suggests in its consultation that the SSB it proposes must have its own conceptual framework of accounting quite separate from that of the IASB, which is responsible for financial reporting. This, however, is to deny the whole advantage that the IFRS might bring to this issue. That advantage would arise from the integration of these two types of reporting, as I now think essential. I have proposed this idea in what I call sustainable cost accounting. This would require that all large corporations bring a provision for their cost of eliminating carbon from their activities onto their balance sheets as an upfront provision that estimates the full cost of doing so. They would then be required to report their progress annually in seeking to achieve this aim.

The intention of such reporting is simple and obvious. It is to demand that companies bring climate change into the core of their thinking and into their general ledgers. In financial accounting terms the reason should be apparent: if they do not do so now, then they might no longer be considered going concerns given the urgent pressure for change, which is what the ESG community is reflecting in its demands.

That thinking may be symbolised like this:

Financial and sustainability reporting diagram

It is the going concern principle within the constraint of net zero carbon that is now the predominant issue for a great many of the world’s corporations. And the threat to companies, whether they are producers of carbon-based energy, or one of the multitude of companies who sell products based on carbon products, is whether they are now able to prove that they are going concerns or not. The issue within their financial reports is not now, in that case, whether they are viable when appraised by IFRS, but whether they are viable against the sustainability standards of society – which are now the dominant issue, as my diagrammatic representation suggests.

In that case, is the IFRS seeking to offer the right solution for this moment, or is it failing to even ask the right questions on sustainability? I would suggest the latter. Others might disagree. But what we can be sure of is that this issue is not going away.

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By philaccountant
25th Nov 2020 09:51

Interesting, but from reading many articles over recent years on the poor quality of financial auditing by the biggest global firms, I'm not filled with confidence. They seem barely able to detect fraudulent *accounting* practices which are objectively measurable. Sustainability is a much harder thing to even define, let alone measure accurately and audit effectively.

It seems big companies will spend lots of money patting themselves on the back for their green credentials, whilst everyone down the supply change does their dirty work for them. When the inevitable happens and these sustainability reports they make for themselves turn out to be hot air, there will be lots of hand wringing and finger pointing, with little being achieved. Oh, and some piffling fines that do nothing to actually change their behaviour.

I am very cynical though.

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