By Leigh Roberts CA(SA)
There’s a lot going on in the international corporate reporting arena; leaving many bewildered, bemused, and, for some, a tad irritated to see the main players jostle to get their agendas met. So, here’s my personal view on what’s going on in this unfolding (and still uncertain) story.
The ISSB (International Sustainability Standards Board) looks like a done deal and will be announced by the Trustees of the IFRS Foundation in November this year. The ISSB is likely to focus on developing international standards to uniform the disclosure by companies of the impacts on them arising from certain sustainability matters (the ‘inward impacts’). This stems from the recognition that: Non-financial factors can hugely affect a company’s longevity; the financial performance/ factors covered by accounting standards only amount to a small and ever-diminishing percentage of a company’s market value; and, investors want better information from companies to enable them to make informed risk-reward investment decisions.
On the ISSB standards that could come out… They will be aimed at meeting the needs of investors. The targeted sustainability matters are climate change, biodiversity, with others to follow. The standards could be tailored to be industry-specific (dedicated KPIs, material issues, etc.). Each standard could be structured around the TCFD recommendations (its four disclosure areas are governance, strategy, risk management, and metrics). The standards could have a limited focus – that is, they address the ‘inward impacts’ on the company (hits to cash flow projections, risks, strategy changes, etc.) with limited disclosure of the company’s impacts on society, economy, and environment (the ‘outward impacts’).
(Those up in arms over this last point – and the obvious contradiction to the generally accepted understanding of the term ‘sustainability’ – should be aware that this positioning neatly secures continued relevance for the GRI, and hey, if companies were to account for all their external impacts would any still be in business and would any investors still invest?)
There is another tangent at play. The IFRS Foundation’s existing IASB (International Accounting Standards Board), which will be the ‘brother’ to the new ISSB, recently issued an Exposure Draft to seek public comment on its revised Management Commentary (MC) Practice Note. The MC is traditionally a voluntary letter of explanation accompanying the Annual Financial Statements which aims to put the financial figures in context. The IASB started a project a few years ago to pick up integrated information and other reporting innovations to include in the MC. A lot of this has been taken from the International <IR> Framework.
But, there are some major problems within the revised MC…. As it’s a letter from management it could muddle board accountability; it’s narrow as it focuses largely on ‘inward impacts’ rather than ‘outward impacts’; it’s only a partial inclusion of the International <IR> Framework; it excludes information on Governance; its role is unclear (is it a part of the Annual Financial Statements under the IASB, or a part of the new ISSB’s framework, or does it overlord as the ‘head of the octopus’/ top of the pyramid?); and there is the oddity of the Annual Financial Statements and Sustainability Report being approved by the Board and connecting the two will be a comment by management).
If I were a company, my personal view at this stage of the game, is that I would:
- Carry on with the status quo. There is still much uncertainty in international developments and who knows how long it will take.
- Keep a beady eye on international developments (the IRC of SA keeps its members updated with webinars and there is an update page on this website). Know that whatever happens internationally will have to dovetail in with national laws, governance codes and practices.
- Companies adept at integrated reporting will have the advantage of sustainability systems and controls already being in place and making the connections between the financial and non-financial (6 capitals).
- Ensure the internal controls and systems on sustainability matters are ‘assureable’ as external assurance is likely to come next.
- Become au fait with the TCFD recommendations (they’re pretty entrenched in global thinking and likely to be the basis of the ISSB standards and maybe whatever comes out in the final MC).
- Take a look at the SASB indicators – talk is there’s a big push to get the indicators into the new ISSB standards.
- Take the time to get your voice heard with comment submissions.
Let’s all aim to get what matters most measured and accounted for by companies. Respect for all 6 capitals used and affected by a company and its products. For short-term thinking to switch to the longer term. Awareness that what a company does today sets it up for tomorrow. Transparent reporting. Board accountability.