Financial Reporting Brief April 2019

Insights

Financial Reporting Brief

April 2019

This month’s article 'Sustainable Development – A Goal For All' considers some background and foundation blocks for the heightened awareness of sustainability in strategy and response to risk, and some recent developments.

Our Quarterly Financial Reporting Brief provides an update on developments during the quarter including reporting on sustainability and climate change, insurance accounting, intangibles, stewardship code and a number of other matters.

Sustainable Development – A Goal for All

The European Non-Financial Regulations, introduced in Member States in the past year or so, will assist in broadening the depth of corporate reporting and ensuring that sustainability reporting is recognised as being important to delivering key messages to investors and stakeholder in a transparent and comprehensive manner.

Previous articles have commented on various aspects of non-financial reporting and it is opportune to look at some of the background and key drivers. .

In recent weeks, the Technical Expert Group (TEG) set up by the European Commission (EC) presented its interim report on the status of the work conducted around the EU Green Bond Standard. The TEG was set up by the EC in June 2018 following the publication in March 2018 of the EC Action Plan on Financing Sustainable Growth, which sets out a comprehensive strategy to further connect finance with sustainability.

Even more recently, the Corporate Reporting Dialogue (CRD) have announced a new two-year project. The Better Alignment project is focused on mapping sustainability standards and frameworks to make it easier for companies to prepare effective and coherent disclosures that meet the information needs of capital markets and society.

In late 2018, the US Sustainability Accounting Standards Board issued the world’s first set of industry-specific sustainability accounting standards covering financially material issues in 77 industries. They are global in nature and address the subset of sustainability factors most likely to have financially material impacts on the typical company in an industry.

Underlying these developments are a number of key initiatives including the foundations laid by the United Nations General Assembly of September 2015 which set the Sustainable Development Goals for 2030 – ‘Transforming our World: the 2030 Agenda for Sustainable Development’ – the 2030 Agenda.

The Green Bond
The Technical Expert Group (TEG) set up on foot of The EC Action Plan has the purpose of assisting in four key areas:

  • A unified classification system for sustainable economic activities
  • A European Union Green Bond standard
  • A benchmark for low-carbon investment strategies
  • Guidance to improve corporate disclosure of climate – related information

In its Interim Report, the TEG presents the status of the work conducted so far, providing a rationale for action and explaining how a Green Bond standard should be developed and implemented in Europe. It elaborates on possible incentives to enhance the growth of Green Bond issuance and the links with other sustainable financing instruments.
The Interim Report proposes eleven policy recommendations, four of which relate to the establishment of the EU Green Bond standard and seven are related to ways how European governments and other stakeholders can support the implementation of the EU GBS.

The four on establishment are:

  • Create a voluntary EU GBS, proposing that it be done without imposing a mandatory legal framework, but which would require proper incentivisation
  • Monitor impact and consider further supporting action including possible legislation after an estimated period of 3 years
  • Develop a legislative proposal for a centralised accreditation regime for external green bond verifiers to be potentially operated by ESMA
  • Set up a market-based voluntary Accreditation Committee for external verifiers of green bonds for a transition period

Corporate Reporting Dialogue
The Corporate Reporting Dialogue was launched four years ago as the principal working mechanism globally to achieve dialogue between the key standard-setters and framework developers that have a significant international influence on the corporate reporting landscape. The participants have already adopted a Statement of Common Principles of Materiality, developed a common map of the reporting landscape, and taken a common position in support of the recommendations of the Financial Stability Board task force on Climate-related Financial Disclosure.

An important aspect of the Better Alignment project is to achieve the ultimate aim of integrating financial and non-financial reporting, improving coherence, consistency and comparability which is essential for the long-term efficient allocation of capital given the changing nature of risks and opportunities.

Participants in the CRD include the International Accounting Standards Board, the UK Financial Accounting Standards Board, the Sustainability Accounting Standards Board, the International Integrated Reporting Council and a number of others. The coalition is promoting communication about value creation as the next step in the evolution of corporate reporting.

Sustainability Accounting Standards
The Standards, which are industry specific, were developed and published by the Sustainability Accounting Standards Board, an independent, non-profit standard setting organisation. The Standards are evidence based, developed with broad market participation and are designed to be cost effective for companies and decision useful for investors.

SASB Standards support robust investor-grade reporting in a range of communication channels, including financial filings, sustainability reports, annual reports and corporate websites. The Standards can be used alongside other sustainability frameworks and are well-aligned with the recommendations of the Task Force on Climate-related Financial Disclosures and are complementary to the Global Reporting Initiative.

The SASB’S mission is to help businesses around the world identify, manage and report on the sustainability topics that matter most to their investors. The Standards are a means towards achieving this and further enhance the transparency of corporate reporting.

The SASB also provides support to investors with various publications including:

  • Engagement Guide for Asset Owners and Managers – which aims to establish a common language around the sustainability issues that matter most to financial performance
  • ESG Uncovered – questioning whether the quality of corporate reporting on ESG and sustainability factors is up to par, showing that when one digs a little deeper, gaps and problems with reporting become apparent

Sustainable Development Goals
The Sustainable Development Goals (SDGs) cover social, economic and environmental development issues including poverty, hunger, health, education, gender equality, clean water, sanitation, affordable energy, decent work, inequality, urbanisation, global warming, social justice and peace. In total, 17, with 169 targets and 232 indicators.

The Global Reporting Initiative (GRI) and the United Nations Global Compact have recently announced their continued partnership to develop best practices for corporate reporting on the Sustainable Development Goals (SDGs), empowering businesses to prioritize SDG targets and measure and report on progress.

The Action Platform on reporting on SDGs, led by the two organizations, was established in 2017, and has since resulted in increased awareness about the importance of measuring and disclosing companies’ contributions towards the 2030 Agenda for Sustainable Development.

The Action Platform provides an opportunity for business to engage with a multi-stakeholder advisory committee consisting of representatives of academia, policy making participants, investors and civil society. In the coming years, the platform expects to continue to attract more companies to take action on reporting on the SDGs. Significant guidance has been made available in a number of key publications.

Key to making the SDGs successful is to make the data on the 17 goals available and understandable. To track progress towards the goals and see where the world currently stands, the University of Oxford publishes the SDG-Tracker. The Tracker allows anyone - policymakers, researchers, government officials, civil society - to understand current status and how progress is being made towards achieving the SDGs. This interaction at all levels is critical if momentum is to be created and pressure put on governments, business, politicians and broader society to accelerate progress. It holds governments accountable to the general public: people must have a way of seeing whether their country is making progress, and if not, be able to ask questions as to why not.

With169 targets to meet, there are many for which there is still no data available and these gaps in understanding need to be filled soon. The SDG Tracker highlights where the gaps are.

Conclusion
Corporate sustainability starts with a company’s value system and a principles-based approach to doing business. Responsible businesses enact the same values and principles wherever they have a presence, and know that good practices in one area do not offset harm in another. By incorporating the Principles of the UN Global Compact into strategies, policies and procedures, and establishing a culture of integrity, companies are not only upholding their basic responsibilities to people and planet, but also setting the stage for long-term success. The International Organisation of Securities Commissions (IOSCO) encourages issuers to consider the materiality of ESG matters to their business and to assess risks and opportunities in light of their business strategy and risk assessment methodology.

Global organisations have become increasingly aware that sustainability is much more than just another item in the long list of concerns they have to manage. Leading organisations are enhancing their governance and management of sustainability risks. The right approach can help organisations confidently seize a competitive advantage.

Companies need to commit and to devote time and resources to engaging with and reporting to investors and stakeholders comprehensively and transparently.

For additional information and observations visit our Deloitte IAS Plus site.

What's New? Monthly Reporting Pack – April 2019

Irish/UK GAAP & Related Developments

IFRS & Related Developments

Publications

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