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People and Planet in the Accounts: sustainability standards - materiality is critical to the conversation

30 November 2020: Clara Barby is Chief Executive of the Impact Management Project – a forum for building global consensus on how to measure, manage and report impacts on sustainability.

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The Impact Management Project (IMP) exists to facilitate progress towards global consensus on how to measure, manage and report impacts on sustainability (social, environmental and economic). To do this, the IMP provides technical facilitation to global standard-setting organisations. And, importantly, the IMP is housed by ICAEW in its London offices.

“Part of our work includes looking at sustainability-related information that is important for market capitalisation of companies, but that is not captured in financial statements. In that respect, it is an extension of financial accounting as we know it,” says Barby. “There are good reasons why we are linked to the ICAEW for this kind of progressive work.”

She explains that the IMP was established in 2016 to help address the complexity that surrounds measurement, management and reporting of impacts on sustainability, whose evolution is akin to the state of financial accounting and reporting in the 1930s and 1940s following the Great Crash of 1929. 

“After the Great Crash there was a moment when we needed to come together and make progress towards international standards that were coherent across markets,” says Barby. “The IFRS Foundation was established much later, but the process of convergence actually started earlier in the 20th century.”

She stresses that companies should not be competitive about how they account for their sustainability performance, but about what that performance is. “This is an important shift so that we can compete on who can contribute the most”.

Things clearly need to change, but Barby strongly believes in the collective power of existing standard-setters. “There are a lot of different organisations with different roles, which often come under fire due to how many there are. But many of them are actually complementary if you really look at the technical detail,” she says. 

“We’ve been set up to provide a space – a neutral, facilitated, non-profit – in which standard-setters can coordinate with a view to global consensus. We are a team that has a deep understanding of the subject and who can provide technical support to the organisations that are involved.”

The Structured Network facilitated by the IMP is made up of 16 standard-setters that are the leading voices on measurement, management and reporting of impacts on sustainability topics. As part of these efforts, the IMP is facilitating a coordinated effort by the five standard-setting organisations that guide the overwhelming majority of sustainability and integrated reporting today: CDP, the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB). 

In September 2020, this coordinated effort was described in a joint Statement of Intent to work together towards a comprehensive corporate reporting system that meet the needs of the capital markets and other stakeholders. The statement was followed by an open letter, in October 2020, to Erik Thedéen, Chair of IOSCO’s Sustainable Finance Task Force, explaining the shared commitment of the leading integrated and sustainability standard-setters to contribute to achievement of a globally accepted system. It also welcomed the consultation underway by the Trustees of the IFRS Foundation about possible ways the Foundation might contribute to the development of global sustainability standards, by broadening its current remit beyond the development of financial reporting standards.

“We also see the European Commission’s leadership as critical to arriving at a global solution,” says Barby. 

So, what do these measures need to look like? “Everyone agrees that materiality is critical to the conversation. Materiality in both financial and sustainability contexts are very important components of the comprehensive corporate reporting system as articulated in the Statement of Intent. From a societal perspective, information is material if it reflects a significant impact from the perspective of the stakeholder that is experiencing it. From an economic decision-making perspective, information is material if it reflects effects on enterprise value, which may not be reflected in the financial accounts” she says. “A lot of the information driving enterprise value can be thought of as ‘sustainability-related information’ and overlaps significantly with information that is material to society.”

Barby is adamant that we should not allow the lens of enterprise value to dominate the conversation, since there are many different stakeholders served by corporate reporting and there can be impacts on sustainability that may not meet the test of being sufficiently linked to enterprise value for them to be disclosed. “There are some stakeholders who have much less power – in other words, their views may not yet be reflected in the conditions that cause impacts to affect enterprise value, such as stakeholder pressure, international norms, or regulation. But, the voices of these stakeholders must still be heard,” she says. 

“2020 is a big year for making rapid progress towards a more comprehensive corporate reporting system and I am encouraged by the momentum underway from all sides.”

Article series: People and Planet in the Accounts

Convergence of non-financial frameworks and standards is gaining momentum and we are beginning to see how nature and society might be included in the financial statements. But can these frameworks tolerate such change? In these articles we explore this from the perspectives of different actors in the debate.

See the series