People and Planet in the Accounts: sustainability reporting and the role of ICAEW
30 November 2020: In the midst of all the various initiatives taking place to put people and the planet into the accounts, ICAEW – and particularly its Financial Reporting Faculty – has been heavily active.
There is significant momentum to improve sustainability reporting, including from the UK Government and the FRC. “The UK Government has recently announced its intention to mandate the use of the TCFD framework for large companies and financial services companies by 2025,” points out Sarah Dunn, Technical Manager in the Financial Reporting Faculty, “and the FRC has produced its Climate Thematic, encouraging UK public interest companies to report against the TCFD recommendations and to use the Sustainability Accounting Standards Board (SASB) metrics with reference to their sector. Recent consultations – from the FCA and the Department for Work and Pensions – also look to the TCFD framework as a way to improve reporting on climate-related risks and opportunities.”
Whether it is monitoring developments, participating in discussions with stakeholders, responding to consultations, or providing guidance, ICAEW’s Financial Reporting Faculty is deep into the detail.
“It is important to be aware that when we are talking about putting people and the planet into the accounts, there are two aspects to this from a reporting point of view,” says Dunn. “Firstly, there are the numbers and notes that appear in the financial statements, and secondly there is the information included in narrative reports.”
In terms of what the Financial Reporting Faculty is currently doing – in relation to reporting in the financial statements – Dunn says: “We are very supportive of the guidance issued by the IASB which includes the article ‘IFRS standards and climate-related disclosures’ and the recently issued education material ‘Effects of climate-related matters on financial statements’ The IASB’s guidance explains how the existing requirements of International Financial Reporting Standards (IFRS) apply to climate change.”
She continues: “This is an important piece of guidance as it highlights how all companies need to ensure that the current or future impacts of climate change (and other emerging risks) are reflected appropriately in the financial statements. For example, the impacts of climate change are already affecting the valuation of assets, assumptions used in impairment testing and the useful economic lives of assets.”
In relation to the front end of the accounts – the narrative reports – there are a number of areas where a UK company might already need to provide information in relation to impacts on people and the planet. Principally, there is the strategic report, including the s172 statement. Certain information is also required in the directors’ reports of some large companies, for example, on energy and carbon use and engagement with stakeholders.
In relation to the strategic report, Dunn points out: “All but the smallest companies are required to provide an overview of their business, including a description of the principal risks and uncertainties facing the company, in a strategic report.”
“The strategic report should contain information that is material to shareholders and helps them assess whether the directors have performed their duty to promote the success of the company. When the directors of a company consider environmental matters, for example, climate change, to be a principal risk or uncertainty facing the company, this should be discussed in the strategic report.”
Quoted companies and public interest entities with over 500 employees (PIEs) are also subject to specific reporting requirements on environmental matters within the strategic report. These could be, for example, details of policies pursued on environmental matters and the effectiveness of these policies. Dunn points out that this information is required to the extent that it provides information that is necessary for an understanding of the development, performance, position (and impact in the case of PIEs) of the company's business. Further information on the strategic report and how to prepare one can be found here.
An s172 statement, explains Dunn, is a statement in the strategic report which describes how the directors, when performing their duty to promote the success of the company for the benefit of its members as a whole, have had regard to matters relevant to wider stakeholders, for example, employees or suppliers.
“The faculty has focussed on raising awareness of any new narrative reporting requirements and to provide guidance as required,” says Dunn. “In the past, we have contributed to the FRC’s consultation process for its guidance on the strategic report. We are also closely monitoring developments in this area to identify any issues and emerging best practice.”
She continues: “In particular, the new s172 report is a hot topic and we welcome the FRC’s Financial Reporting Lab recent guidance ‘Section 172 statements: How to make them more useful’ which provided some much-needed guidance in this space.”
Looking ahead, there is an important discussion raging on the move towards a single global set of sustainability reporting standards.
“This is because lots of different frameworks and initiatives create a confusing landscape for preparers and can lead to what some refer to ‘greenwashing’ as companies may be selective about what information they provide,” says Dunn. “It also leads to a lack of comparability.”
There have been a number of calls for a global set of standards, including from:
- Accountancy Europe and its paper on ‘Interconnected Standard Setting’
- The Statement of Intent to Work Together Towards Comprehensive Corporate Reporting issued by CDP, CDSB, GRI, IIRC and SASB
- Support from IOSCO and IFAC
- ICAEW’s discussion paper ‘Non-financial reporting: ensuring a sustainable global recovery’.
What is more, the IFRS Foundation has issued a consultation on sustainability reporting. The consultation considers the role that the IFRS Foundation might have in sustainability reporting. It sets out various approaches but ultimately suggests that the best option would be to create a Sustainability Standards Board (SSB) which would set sustainability reporting standards. The SSB would sit alongside the IASB, with oversight from the existing IFRS trustees and Monitoring Board.
“Depending on the outcome of the consultation,” points out Dunn, “this would be a marked and important change in strategy for the Foundation, which until now has primarily focussed on financial reporting.”
To keep up to date with the work of the Financial Reporting Faculty see icaew.com/frnews