2020 was a remarkable year in ways that need no mention. It was also remarkable in a way that most people probably didn’t notice because it has to do with accounting. Last year witnessed the broad recognition in the investment, business, accounting, regulatory, and sustainability reporting communities that the time has come for mandated standards on sustainability reporting, just as we have for financial reporting.
Until now the world had progressed from no interest in sustainability reporting at all (often by the awkward term of nonfinancial information but one not likely to disappear) to the view that “market forces” will take care of this. If investors really care about such information, the argument goes, then companies will provide it on a voluntary basis. This ignores the fact that it was regulation, not market forces, that brought us standards and reporting requirements for financial information. Why should it be any different for information on a company’s sustainability performance?
Signaling the shift from “market forces” to the need for regulation, in September 2020 the Trustees of the IFRS Foundation published their “Consultation Paper on Sustainability Reporting.” It proposes that the Foundation establish a “new Sustainability Standards Board (SSB) under the governance structure of the IFRS Foundation to develop global sustainability standards” in order to “harmonise and streamline sustainability reporting, which could benefit stakeholders of the IFRS Foundation and benefit sustainability reporting.” The result would be a set of standards for mandated reporting of the same rigor and relevance as those developed by the International Accounting Standards Board (IAS).
This consultation paper comes only two years after my Oxford colleague Richard Barker and I published our October 2018 Green Paper “Should FASB and IASB be responsible for setting standards for nonfinancial information?” This paper was the basis of a heated debate at the Oxford Union. While the “Ayes” carried the day about two-to-one, it was far from a unanimous vote.
This change in narrative has been a long time coming and happened rapidly. Exactly 30 years ago, in “The Performance Measurement Manifesto” (Harvard Business Review, January-February 1991) I argued for the importance of companies to measure and report nonfinancial information. In a spirit of premature enthusiasm, I suggested that the SEC might even make this mandatory at some point.
Subsequent years have seen the formation of the Global Reporting Initiative (1997), CDP (2000), the Climate Disclosure Standards Board (CDSB-2007), the International Integrated Reporting Council (IIRC-2010; I was one of the founders), and the Sustainability Accounting Standards Board (SASB-2011; I was the Founding Chairman). In September 2020 these five NGOs published a paper about how they would collaborate together to harmonize their efforts. Concrete evidence of this is the recent paper facilitated by the Impact Management Project focused on carbon reporting. Other important initiatives in support of sustainability reporting include the EU’s Non-Financial Reporting Directive (2014), the Task Force on Climate-related Financial Disclosures (2015), the EU Taxonomy (2020), and the World Economic Forum’s International Business Council initiative on sustainability reporting which published their report this September 2020. Thanks to all of these efforts, the foundation has been laid for a Sustainability Standards Board.
The Trustees invited comment letters, due on December 31, 2020. One of the first submissions is a letter from Oxford signed by Richard Barker, Vivienne Cox, Colin Mayer, Hiro Mizuno, Arunma Oteh, Paul Polman, Peter Tufano, and me. It has been endorsed by a distinguished group of 84 academics from 15 countries: Brazil, Canada, Chile, China, France, Germany, Italy, Japan, Korea, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom and the United States. Some 550 letters have been posted from a range of groups including investors, companies, accounting firms and associations, other trade and professional associations, governmental bodies, regulatory organizations, multilateral organizations, NGOs, and academics. For the most part, the responses are quite positive about the Foundation taking on a formal role in sustainability reporting.
The key conceptual issue is the definition of materiality (e.g., investors only or society more broadly). This has implications for the scope of work under the Foundation, as well as how it should be organized. Different views, such as in a letter organized by Barker from seven distinguished professors of accounting and me, have been expressed about whether an SSB is the right approach or some other one would be more efficient and effective, such as expanding the remit of the IASB.
These differences shouldn’t obscure the fact of just how far we’ve come—and how quickly—from the empty “market forces” mantra. The world is no longer debating the need for global mandated standards for sustainability reporting. The debate is now about what exactly is meant by this term, what role the relevant organizations should play, and what is the best path for developing these standards as quickly as possible. There will now be a dynamic and hopefully constructive conversation about the “how,” rather than the previous and more moribund conversation about the “whether.”
Barker and I have submitted our own response to the Consultation. In brief, we argue in favor of establishing an SSB which focuses on materiality from an investor perspective. Here the SSB will greatly benefit from the work of CDSB, IIRC, SASB, and TCFD. This could start with a memorandum of understanding for the transfer of intellectual property from these organizations to the SSB and eventually lead to an absorption of the first three organizations (the TCFD is an initiative, not an organization). A step in that direction has already happened with the November 24, 2020 announcement that the IIRC and SASB intend to merge and form the Value Reporting Foundation, with CDSB already expressing interest in joining as well. The EU has already demonstrated leadership in the importance of the capital markets for sustainable development and its support for an SSB will provide the necessary momentum for other countries to do so as well, including the large capital markets in China, Japan, the U.K., and the U.S.
We also suggest that the GRI’s Global Sustainability Standards Board (GSSB) be separated from the GRI and evolve to become an independent organization with appropriate public interest oversight and the same degree of institutional legitimacy and financial support as the SSB. Through careful coordination, these two organizations can ensure that companies and investors are making the resource allocation decisions necessary to support sustainable long-term financial returns and sustainable development. Here the EU has another important role to play. It can make a critical, even foundational, contribution in establishing this essential complementary organization to the SSB.
Standard setting is a mundane but also contentious exercise. By definition it involves reconciling different views, all of which have legitimacy. Those truly committed to a set of mandated global standards for sustainability reporting need to recognize that compromises must be made. The end result won’t be optimal for any individual view but should be optimal for society.
There is much work to be done in setting these standards and the process won’t be as quick and dramatic as developing vaccines for COVID-19. However, these standards will benefit the world today and generations to come. Hopefully all of those who care about sustainable development will recognize the need for collaboration and compromise. It would be tragic if this opportunity is lost because people cared more about their own point of view than creating the much-needed public good of global mandated sustainability reporting standards.
Source: Forbes, 6 January 2021