Financial Reporting Brief
This month’s article "Reporting on Climate Change and Sustainability - A Major Challenge" comments on the challenge of sustainability and, in particular, climate change and the need for transparent high quality reporting.
Reporting on Climate Change and Sustainability - A Major Challenge
Storms in recent months in Ireland have been at a level of ferocity and extremity that have it seems never been seen before. On a local basis, this is a stark wake up call to the extremities of climate change which have been seen on a global basis. These events have had a dramatic impact and included:
- More than 40 million people affected by massive floods across India, Bangladesh and Nepal with 1,300 killed and at least 1.5 million homes destroyed or damaged.
- Hurricane Irma decimating the Northern Caribbean and Florida with over 30 dead and hundreds of thousands homeless.
- An unrelenting heatwave in California reaching over 100 degrees and leaving six dead.
While the growing impacts of climate change are bad for people in the developed world, including Ireland, many in developing countries have it much worse, given the increased vulnerability, lack of resources and capacity to adapt.
The risk climate change poses to businesses and financial markets is real and already present. It is more important than ever that businesses lead the way in understanding and responding to these risks – and weighing up the opportunities – to build a stronger, more resilient and sustainable global economy.
How does the world of financial reporting play its part in bringing transparency to the challenge of sustainability?
ESG Risks – Transparency Required
Environmental, social and governance (ESG) risks increasingly demand attention. The business context for ESG impacts and risks is evolving rapidly and challenging corporate executives to translate global megatrends such as climate change, resource scarcity and population growth into tangible risks and opportunities for their business to manage. ESG impacts are generally longer–term in nature, and in many cases, beyond the direct control of a company. The linkage of ESG impacts to business value becomes more challenging for accounting for sustainability of performance and growth. At the intersection of sustainability and financial reporting, the Chief Financial Officer (CFO) is usually the person most qualified to define and communicate how a company’s management of ESG risks contributes to value creation.
Sustained and superior performance depends, in part, on supporting decision making by effectively measuring and reporting a pragmatic and relevant set of financial and non-financial metrics. There are many potential metrics such as those to evaluate ESG factors, resource efficiency, business model resilience, innovative capacity, brand strength and corporate culture. Most companies who measure non-financial metrics disclose a subset of that information in a separate sustainability report in the Annual Report. The challenge faced by companies is how to determine what information to disclose.
Communicating with Investors
It is important that entities establish credibility and build trust through transparency. A strategy for meeting this challenge is likely to be along the following lines:
- Prepare sustainability disclosures in accordance with established sustainability standards and reporting frameworks e.g. The Global Reporting Initiative on Sustainability (GRI), to make information publicly available to communicate the company’s command of ESG topics, risks and opportunities impacting its business and driving value for stakeholders;
- Design and maintain well documented and thorough internal reporting processes, controls and procedures for ESG disclosure to help improve the value of reporting;
- Establish and publicly communicate ESG targets and key performance indicators;
- Engage the internal audit function as an important component of the ESG management reporting system by enhancing the reliability of ESG reporting;
- Obtain external assurance to increase stakeholder confidence in the integrity and reliability of ESG reporting.
Created in line with the objectives of financial reporting and rules on non-financial reporting firmly in mind, the GRI seeks to offer companies a framework for reporting ESG information with the same rigour as financial information.
Climate Change – A Major Issue
The Task Force on Climate-Related Financial Disclosures (TFCD) which was set up by the Financial Stability Board to develop voluntary, consistent climate-related financial risk disclosures has published its final recommendations for effective disclosure of climate-related financial risks. The four widely adaptable recommendations on climate-related financial disclosures that are applicable to organisations across sectors and jurisdictions were widely supported, as follows:
- Governance – Disclosure of the organisation’s governance around climate related risks and opportunities;
- Strategy - Disclosure of the actual and potential impacts of climate-related risks and opportunities on the organisation’s business, strategy and financial planning;
- Risk-management – Disclosure of how the organisation identifies, assesses and manages climate related risks;
- Metrics and targets – Disclosure of the metrics and targets used to assess and manage relevant climate-related risks and opportunities.
The World Business Council for Sustainable Development (WBCSD) has released the CEO Guide to climate-related financial disclosures. The new Guide sets out clear actions that CEOs can take to align their organisations with the recommendations of the TFCD. The WBCSD very clearly recognises that we need a much wider view of the economy to be presented in financial reporting, incorporating ESG factors. This will better inform financial decision-making over the long-term, while making business more accountable for the environmental and social impact of their operations.
Whether directly or through the links of the supply chain, all entities are subject to the impact of ESG risks and ultimately the consumer will be subject to price risks, supply chain volatility and scarcity of resources.
Security around how companies conduct business is intensifying as investors, regulators and consumers seek more details and a deeper insight into the effect of business operations on the environment, society and regulatory compliance. More rigorous analysis and disclosure of ESG performance will be essential for companies to maintain consistent credibility and trust among an expanding set of stakeholders and, at the same time, drive performance in a manner that can be transparently evaluated by internal and external stakeholders.
The Deloitte publication ‘How CFOs can manage sustainability risk and find long-term value’ gives us an opportunity of reading about examples of how issues evolve to become sustainability risks and call on corporates to advocate sustainable business practices and transparent ESG reporting.
What's New? Monthly Reporting Pack – December 2017
Irish/UK GAAP & Related Developments
- FRC reminds Boards of companies in the construction and business support services sectors of their reporting obligations
- PRA letter to CFOs on minimum disclosures about ECL on transition to IFRS
IFRS & Related Developments
- ESMA issues statement on income tax consequences of the US tax reform under IFRS
- EFRAG reports on possible effects on long-term investments of IFRS 9 requirements
- IASB publishes a summary of IFRS 17
Legal & Regulatory Developments
- Deloitte Football Money League 2018
- 2017 Global Impact Report
- Deloitte Crane Survey
- Global Perspectives for Private Companies
- Heads Up — Observations from a review of public filings by early adopters of the new revenue standard
- Need to know — Accounting for the effects of the U.S. tax reform legislation
- Need to know — FRC publishes Triennial Review 2017 Incremental improvements and clarifications (Amendments to FRS 102)
- Accounting Roundup January 2018
- IFRS on Point
Financial Reporting Brief
- Quarterly Financial Reporting Brief: January 2018
- January 2018: Financial Reporting – Importance of Corporate Culture
- December 2017: Corporate Annual Reporting – Be Positive To Change
- November 2017: Planning the Annual Report
- Quarterly Financial Reporting Brief: October 2017
- October 2017: IFRS 9 – Some Reactions to Implementation
- September 2017: Evolution – The Principles of Disclosure
- August 2017: Integrated Reporting - A Solution?
- July 2017: Balance Sheet Size To Grow? – New Leases Standard
- Quarterly Financial Reporting brief July 2017
- June 2017: Revenue - A New Standard for All
- May 2017: Financial Instruments Accounting – A New Age
- April 2017: The New Standards - Busy Times Ahead
- Quarterly Financial Reporting Brief: April 2017
- March 2017: Long–Term Value Focus - ESG Reporting
- February 2017: Financial reporting - Incremental Improvement
- January 2017: The Future of Financial Reporting