Accounting for sustainability is 'a really big deal'

If you happened to have read this column before, you will know that accounting is a bit of a pet subject of mine. In the context of sustainability, it makes complete sense that the environmental and social factors investors (and other stakeholders) are increasingly asking about would be reported in as standardised as possible way across industries and across jurisdictions. Here, the work of accounting standards setter IFRS’s International Sustainability Standards Board (ISSB) will be consequential. After its launch during COP26, work is underway to officially merge the organisations in charge of some of the most used sustainability reporting frameworks under ISSB: the Climate Disclosure Standards Board (recently incorporated) and the Value Reporting Foundation (to join by June).

So, as I caught up with the CEO of the Value Reporting Foundation recently, Janine Guillot, who is now also special adviser to ISSB chair Emmanuel Faber and an accountant by training, I was keen to ask about what these series of mergers mean for the task of making order in and sense of companies’ activities. 

Q: What reporting framework will we end up with?

A: The proposed architecture of ISSB standards include three things: general requirements for disclosures around things like governance, strategy, risk management; thematic requirements, for example climate risk; and then industry-specific requirements. The Sustainability Accounting Standards Board (SASB) standards [that are part of the Value Reporting Foundation] are the starting point for those industry-specific requirements. They’ve been through a fairly rigorous due process already but in order for the ISSB to use them, they need to put them through the ISSB’s own global due process. 

We already know of improvements we would want to make to the SASB standards. One is to fully internationalise certain metrics that currently are not fully applicable globally. We are already looking at suggested technical corrections from SASB users. The new board will need to hear from market participants.

Q: Will the prospect of regulation change corporate behaviour?

A: Unless people are deep in the weeds of accounting standard setting, they don’t always realise that this is a really big deal: these are sustainability disclosures embedded in the accounting standard-setting infrastructure and with oversight from regulators. I wouldn’t expect companies to wait for regulators to act. I would expect them to continue to move their disclosures forward using the tools that are available including the Task Force on Climate-related Financial Disclosures and the SASB standards – definitely now that the prototypes have been published as they give companies insight into the early direction of travel for ISSB standards. 

Q: Last year, research showed that 70% of a group of 107 publicly listed companies didn’t disclose climate risks in financial statements. Does this surprise you?

A: It actually doesn’t surprise me because for so long climate-related risk has been lumped under this broad concept of sustainability disclosure, which has been viewed as not necessarily relevant to the financial valuation of a company. But I would be surprised if 70% of companies reviewed weren’t disclosing anything about climate anywhere. You have to be so precise about language and make sure everyone’s speaking the same language and you know exactly what someone is trying to say.

Q: The same research noted that 80% of auditors didn’t pick up any discrepancies between sustainability disclosures and financial statements. Is that an issue?

A: This is a very interesting finding. I think increasingly boards of directors and audit committees are taking an interest in how sustainability information is delivered to investors. But companies have to get the internal processes in place to make sure that’s possible. We think that sustainability information should be prepared with the same systems of internal controls and board governance and oversight as financial information. We’re less focused on where the information is put because it does vary so much based on legal frameworks around the world. 

Q: Are accountants and auditors ready to deal with the potential revolution that ISSB can bring about?

A: I started my career as an accountant, and I think accountants bring a lot of skills to this conversation: on internal controls, data governance, how to aggregate huge data sets globally. If you think about what the accounting department of any big multinational has to do to even report revenue, that’s a huge task. What they don’t necessarily always bring is knowledge around sustainability issues, and how those issues can impact the value of the company. They don’t necessarily have an understanding of how investors actually use this data and integrate it into investment decisions. 

For the SASB standards, we have a fundamentals of sustainability accounting certification, a lot of accountants engaged with this. What’s fascinating is that with the creation of ISSB, the involvement of the US Securities and Exchange Commission, and the work of the European Commission, all of a sudden this area has got the attention of a much broader group of people, as potential new standards and regulatory changes may impact their jobs.