Sustainability and other non-financial reporting is about to become mandatory, starting with climate-related financial disclosures by publicly quoted companies, large private companies and LLPs.
But there is still little consensus, particularly globally, about what standards for non-financial disclosures should look like. This poses a challenge for organisations that are under particular pressure to measure and demonstrate their ecological and social credentials as well as their financial data.
The government has set requirements for pension schemes, particularly the largest ones, to report against Taskforce on Climate-related Financial Disclosures (TCFD) rules. This is filtering down into smaller schemes, says Paul Lee, head of stewardship and sustainable investment strategy for Redington.
“That has driven a great focus on climate change issues among pension schemes, but actually the whole dynamic of our collective recognition of the scale of the climate challenge has also driven a great deal of focus on climate issues.”
A number of the largest pension schemes and others have already made commitments to be net zero in their investment approach by various target dates between now and 2050. Because of those targets, they are setting standards and expectations of service providers, particularly in the fund management sector. That, in turn, puts pressure on businesses to do better, and improve their reporting around climate-related disclosures.
“If companies are not investing in ways that actually will deliver the promises that they are making to be net zero by certain dates…then we are wasting our investment money,” says Lee. “Assurance can play a key role in helping ensure that the gap is closed between the rhetoric that we see in the narrative reporting and the reality reflected in the financials.”
Sandra Latner, Senior Director of Sustainability and ESG Investor Engagement for Pearson, says that for progress to continue, we need to see more global harmonisation of standards. We need to agree on a single set of metrics under a unified reporting framework, she says, with a consensus on when and how often that information should be provided. “The more standardised reporting that you can get, the higher the quality of reporting and data you will see from businesses.”
Lynn Provost, chair of the International Audit and Assurance Standards Board (IAASB)’s extended external reporting taskforce, says that the Board is working on two standards, an ‘umbrella assurance standard’ and a greenhouse gas standard. It has also prepared two guidance documents: Extended External Reporting Guidance, and a Staff Audit Practice Alert, The Consideration of Climate-Related Risks in an Audit of Financial Statement.
The IAASB also worked with various stakeholders to identify 10 different issues when it comes to climate and sustainability-related assurance, including a lack of clarity around the competences needed to do the assurance work, how to scope an engagement, ensuring consistency between financial and non-financial reports, and a lack of guidance on assertions and materiality.
“We're being a lot more proactive and targeted with our outreach, and we are preparing to take the right actions at the right time so we've got a suite of information for people in this area,” says Provost. “But we are now looking at how we build our capability, and better understanding of the end needs. And as a part of that we will continue to engage with everybody.”
Veronica Poole, Global IFRS and Corporate Reporting Leader NSE Head of Accounting and Corporate Reporting for Deloitte, says that she is interested to see how COP26 might galvanise action around setting unified standards. Lee hopes that an International Sustainability Standards Board will be created as a result.
“It is really important to get the full value out of sustainability reporting, that it does join up with the financials where you have this disconnect between the two.”
Poole is representing Deloitte at the World Economic Forum at discussions around non-financial reporting. Connectivity between non-financial and financial reports is one of the critical workstreams for the WEF.
“It is not a small challenge, particularly when you have got a history where sustainability reporting very much sat in its own separate box and wasn't necessarily fully embedded or connected to the financial reporting process or systems.”
Veronica Poole says that while it’s clear that mandatory sustainability reporting is coming, the roadmap towards that is not. “We are at this very critical point where harmonisation and global efforts are taking us from the voluntary to the mandatory landscape, but we still potentially run the risk of fragmented regulation and an alphabet soup of regulatory requirements.”
Poole is encouraged to see the UK try to lead the way in driving the harmonisation of standards across the world. The EU and the US are also working to improve standards. Some shared priorities have been identified.
“We live in exciting times, demanding times, and we are moving to global sustainability standards. So we need to get ready and build capacity to be able to report on sustainability information in mainstream annual reports, and we need to be ready to provide the same degree of quality and rigour as we have for financial information.”
This discussion took place at the ICAEW Financial Reporting, Audit and Assurance Conference.
For more on this topic see ICAEW’s dedicated non-financial reporting resources
Non-financial reporting: where are we headed?
What are the challenges that companies face when it comes to non-financial reports, where can improvements be made, and what does the future hold?
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