Ground-breaking steps towards a comprehensive corporate reporting system

I have been privileged to be part of the group as a facilitator, along with colleagues at the World Economic Forum and the Impact Management Project. What drove the discussions was the organisations’ belief that transparent measurement and disclosure of sustainability performance need to be implemented now. Active participation by the business community is essential for preserving trust and delivering the change required to increase progress on sustainability and climate.

Our work has been guided by the clear and consistent calls for action by many stakeholders for a coherent global solution that delivers high-quality information on climate-related and ESG matters. This was evidenced by the responses from influential stakeholders to Accountancy Europe’s Cogito paper ‘Interconnected standard setting for corporate reporting’ – a project for which I chaired the task force. These responses clearly supported the principles that informed the vision set out to achieve global non-financial reporting standards connected to financial information.

Climate change, the global pandemic, and the increasingly clear connection between sustainability performance and financial risk and return are driving the urgency. We now have a unique opportunity to accelerate progress and house all the relevant standards under one roof, to connect sustainability disclosure standards focused on enterprise value creation to financial GAAP.

The statement sets out how this might be achieved: through a series of building blocks. The first block includes sustainability/ESG information that is relevant to enterprise value creation - factors that contribute to increasing or maintaining the value of a company over time. Because of this connection to financial outcomes, there is also a need for over-arching principles for reporting on value creation. Integrated reporting, together with the IASB’s current work on Management Commentary, can provide a suitable basis for this. In the Accountancy Europe paper, we referred to this as a conceptual framework for connected reporting.

Many companies now also seek to report on their broader responsibilities and wider impacts in relation to sustainable development. This thinking is shared by signatories to the US Business Roundtable statement on the purpose of the corporation, and by the collective action of companies who have developed core metrics on value creation, aligned to the UN’s Sustainable Development Goals, working with the World Economic Forum.

The second building block relates to material information about a company’s impacts on the economy, environment or people, communicated through various channels, as required for different audiences. A third block can be introduced for supplemental requirements, to reflect particular policy objectives in a region, or additional sector-based metrics.

The report also emphasises the importance of formal collaboration mechanisms between these building blocks, so that for similar topics, the disclosure requirements are the same, unless there are legitimate reasons for differences. This will be welcomed by companies who have been confused when faced with different metrics for the same topics, and should also make data collection and measurement more effective.

This is a transformational change in how companies run their business, requiring integrated thinking in business decisions. Boards will need to take a fresh look at governance and controls, comparable to what many had to do in response to Sarbanes-Oxley, to introduce the right rigour to enhance the quality and verifiability of reported information. Stakeholders are calling on companies to enhance the social contract and demonstrate how they embrace responsible business. Information on people, planet and prosperity needs to be of the same quality as information on profit.

How can we achieve the ambition?

The statement emphasises the importance of stakeholder engagement to move forward. This has already begun, for example, through dialogue with the World Economic Forum and their project to establish common metrics for reporting on value creation. As Julie Bell Lindsay, the Executive Director of the US Center for Audit Quality (CAQ), comments: ‘It is incumbent upon all market stakeholders to engage in a dialogue to explore a global solution to enhanced corporate reporting.’

I am pleased to see the support that has already been given by influential global organisations for a global standard setting solution based on a public-private model. Private sector standard setting allows for all stakeholders to participate to ensure their buy-in and an independent due process that leads to high-quality standards. Public body oversight and governance provide legitimacy. This collaboration is essential to effect a system change.

Finally, the statement is not only compelling, it is timely.

IOSCO is accelerating moves. In April, they issued a report on sustainable finance that emphasised the urgency to enhance sustainability disclosures. In pursuit of this objective, they see themselves playing an important role to co-ordinate relevant regulatory and supervisory approaches. In addition, the IFRS Foundation Trustees have issued a consultation on their role in sustainability reporting. The Chair of IOSCO’s Task Force on Sustainable Finance, Erik Thedéen, has said in a speech that ‘taken together, these steps may lead to the foundation of a structure that can deliver a more coherent and comprehensive corporate reporting system’.

We now need to take the next bold steps and plan to meet significant milestones in time for forthcoming global conventions such as Davos, G7 and COP26 over the coming year.

The collaboration by CDP, CDSB, GRI, IIRC and SASB and their commitment to achieve a global system solution help to align the stars. As I have written before, we do not have time to start again. It is exciting to see that the ‘best of what we already have’ is driving that vision.