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quarterly issue 2

How can sustainability reporting change the way companies work?

Author: ICAEW Insights

Published: 19 Jul 2020

The case for sustainable business practice is arguably more important than ever in light of the global pandemic, but discussion on how to proceed continues to exercise minds. We asked five experts for their view.

Veronica Poole

Partner, Deloitte, Global IFRS Leader, and Head of Accounting and Corporate Reporting

We have reached a tipping point. Sustainability is no longer just a highly topical issue for activist investors and non-governmental organisations. It is in the spotlight for policymakers, regulators and businesses who are integrating these measures into their core strategies. Now is the time to make the decisive step towards global standard-setting for the benefit of all. 

Comprehensive disclosure and accounting for climate-related risks are critical for orderly transition and investment for the net-zero world. The Task Force on Climate-Related Financial Disclosures’ (TCFD) recommendations have achieved considerable momentum and are becoming the ‘go-to standard’, according to former Governor of the Bank of England, Mark Carney, who has confirmed support for mandatory TCFD reporting at COP26.

TCFD’s successful implementation requires a definitive standard on the supporting metrics for us to monitor progress towards the stated climate pledges. 

We need to be able to outline, measure and report some of the key metrics consistently, for example emissions by scope, energy use, intensity and water withdrawal in areas of high stress. 

Without this rigour, it will be impossible to achieve the accountability and transparency that we need. And it will avoid greenwashing the system.

Consensus among stakeholders could provide the momentum to move quickly. By developing global standards for core metrics, we can achieve consistency and comparability in disclosures. 

This is what stakeholders are asking for and what the market needs. This should be our most urgent corporate reporting goal. We will be delivering solutions essential to direct capital to sustainable enterprise.

Richard Murphy

FCA, Director, Corporate Accountability Network, Professor of Practice in International Political Economy at City, University of London

Sustainability reporting by major corporations isn’t working. No framework properly recognises the importance of Scope 3 Greenhouse Gas Protocol reporting. No reporting standard requires that the cost of becoming a net-zero-carbon company be reflected on a reporting entity’s balance sheet, so financial data is almost absent from sustainability reporting. And finally, all preferred sustainability reporting, such as the TCFD, is targeted solely at the suppliers of capital to a company and ignores all its other stakeholders, which misunderstands the crisis we face.

Companies need plans to be net-zero-carbon, not just in themselves but in their customer and supply chains. And they must assume no offsets, because these are going to be in very short supply, and that a precautionary principle must apply so they can only use technology that is known to work. 

Then they must cost this programme, have that cost audited, and make full provision for it up-front on their balance sheets. And if they cannot become net-zero-carbon then they must be declared carbon-insolvent and be wound up by the time that status is required. 

We face a crisis and must respond. The suggested response matches the scale of the issue we face.

George Dallas

Policy Director, International Corporate Governance Network

The growing attention on environmental, social and governance reporting (ESG) factors is highlighting challenges in measuring, managing and reporting on these issues. One of our policy priorities is to encourage robust corporate reporting to enable the integration of both financial and material ESG factors into investment decision-making and stewardship processes. Progress is being made but obstacles remain. 

Financial accounting and auditing are in most cases guided by well-established standards and professional practices. This provides a generally accepted foundation for both corporate reporters and users of financial information, investors in particular. Yet for many companies the book value defined by financial accounting reflects only a small portion of overall market valuation. 

Non-financial factors, including ESG factors, that might help explain non-book value more clearly do not benefit from the same level of generally agreed global standards. Standards and frameworks do exist, and most are well-thought through. 

But differences of approach remain, particularly in ESG reporting. This makes it a challenge for investors to integrate ESG factors into the investment process as future-looking indicators of risk and/or opportunity. Investors are looking for a credible lingua franca here to enable them to compare companies meaningfully on common standards. Researchers require consistent ESG data to build the trail of hard evidence as to how ESG affects long-term financial performance. Auditors need to have similar confidence in ESG standards if assurance is to become as standard ESG data as an auditor opinion in financial reporting. 

We have made considerable progress, but the achievement of an ESG data standard that is accepted throughout the world remains elusive.

Sarah Dunn

Technical Manager, Financial Reporting Faculty, ICAEW

A diverse range of frameworks designed to help organisations report on ESG matters currently exists around the world. These initiatives have developed over time, and while there is some overlap, no single framework offers the complete package. This has resulted in a rather confused and fragmented landscape, and has, arguably, contributed to so-called greenwashing, as companies and other organisations can be selective about how or what they report.

That is not to say that the various frameworks are not helpful or important. However, as the intensity of calls to address international environmental and social issues grows, so too do the calls for a global solution to ESG reporting. 

It is also important not to look at ESG reporting in isolation. The numbers and disclosures in the audited accounts are also relevant when considering the broader subject of sustainability reporting. Those preparing IFRS financial statements should be aware that the IASB recently produced an article on IFRS and climate-related disclosures.It sets out how the financial implications of climate change might affect things such as impairment calculations, the useful life of assets, valuations, and provisions. 

The Financial Reporting Council’s announcement of a major review of how companies (and auditors) assess and report on the impact of climate change might focus minds further.

It is worth noting that the quality of reporting is often influenced by how an organisation is actually assessing and integrating ESG factors in relation to its business processes and strategy. Where they have been properly considered and integrated, the reporting tends to flow as a matter of course. 

Similarly, the extent to which information is shared within organisations is key. Too often we hear of a disconnect between those focused on sustainability matters and those preparing the accounts which then becomes apparent in the public reporting. 

While there are challenges to overcome, there may be steps that can be taken now to improve how companies manage and report on sustainability within both their
non-financial and financial reports.

For a summary of the IASB guidance from ICAEW Chief Executive Michael Izza, see tinyurl.com/ICAEW-IASBclimate.

Mathew Duncan

Chief Financial Officer, Tideway

Tideway’s sustainability reporting is closely linked with its issuance of sustainable debt. As a result, sustainability reporting is an essential requirement of the debt issuance programme, giving credibility to our sustainability targets. 

Sustainability reporting comes as second nature to Tideway as the company was created to address a sustainability issue. The project will clean up the River Thames by building a 25km tunnel to intercept millions of tonnes of raw sewage that pollute the river every year. 

Additionally, Tideway aims to deliver a wider legacy for London to boost the river economy, increase jobs, improve safety standards across the industry and drive down carbon emissions. All of these aims fall under our vision of reconnecting London with the Thames. 

Tideway aligned the financing of the project to the company’s sustainability commitments and has issued £1.8bn of sustainable debt so far. We developed a sustainable finance communication strategy to attract and retain investors and aligned the reporting with the relevant UN Sustainable Development Goals.

Some debt investors are paying attention: our debt trades well in the secondary market as demand outstrips supply. Some of our investors use our materials to demonstrate their investment in sustainable infrastructure. Our shareholders regularly use Tideway’s case studies in their reporting to investors.

In particular, we have noticed over the last few years that investors have an increased focus on integrating ESG factors into the investment processes. Through our reporting, investors and other stakeholders have greater transparency into our use of debt proceeds and how this information becomes an integral part of our wider sustainability reporting.