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2021 marks step-change in corporate action on ESG reporting

Author: ICAEW Insights

Published: 03 Sep 2021

More mainstream investors are seeing ESG as real investment issues and are calling for companies to provide better disclosure - something which ramps up the need for improved information systems, says former FASB chairman Bob Herz.

Just a few days before the inauguration of President Biden, an article co-authored by Bob Herz and Laura Tyson, a distinguished professor at the University of California Berkeley and former Dean of the London Business School, appeared in the Financial Times to make the case for efforts on sustainability reporting to be taken up a notch. 

The timing wasn’t coincidental. Herz is optimistic that the change of administration marks an opportunity for a step change in corporate action on sustainability reporting, against a backdrop of broader voluntary uptake of standards in the US. 

The last few years have marked a turning point in investor demand for transparency on financial performance, Herz tells ICAEW Insights. “More and more mainstream investors have started to see ESG as real investment issues and started calling for companies to provide better disclosure. These issues are being taken much more seriously, not just by investors but more broadly by companies and the public at large.” 

However, uncertainty around the format standards should take, whether they should be mandated or voluntary and the absence of international standards remain sticking points. “Investors want relevant, consistent, comparable, trustworthy information. It's no different than with financial information,” says Herz. “We've had a lot of great efforts from a lot of different groups and they're beginning to coalesce, but it would be good to have a common set of standards for everybody to work with.” 

Expectation gathers pace around global sustainability standards board

It’s an ambition that moved a step closer in September when five leading framework and standard-setting organisations - CDP, CDSB, GRI, IIRC and SASB - announced a shared vision for a comprehensive corporate reporting system that includes both financial accounting and sustainability disclosure, connected via integrated reporting.

At the same time, expectations are gathering pace that global accounting standards body the IFRS Foundation will announce the launch of a global sustainability standards board prior to or during the upcoming COP26 summit in Glasgow.

Although hypothetical, Herz isn’t currently interested in serving as a standards board member, although he’d willingly lend his expertise in an advisory role, despite an already mind-boggling array of professional commitments. They span academia (Columbia Business School and an initiative on “Impact Weighted Accounts'' at Harvard Business School), a UN Investment Committee and advisory roles across an array of bodies including the US Public Company Accounting Oversight Board and ICAEW’s Financial Reporting Faculty Advisory Group. Herz is also on the board of directors and various board committees of Fannie Mae, Morgan Stanley, Workiva Inc. and more. 

However things pan out, Herz sees little point in reinventing the wheel on sustainability standards, particularly as uptake of recommendations from the Taskforce on Climate Related Financial Disclosures (TCFD) and SASB standards is gaining momentum. Use of SASB has grown from around 50 organisations three years ago to around 600 including many major companies around the world.

In anticipation of a concrete roadmap, Herz says it’s important that regulators continue to send a clear message to avoid ESG momentum stalling. “I think the FRC did a fine job of signaling what they thought and urging companies to carry on with TCFD and SASB and also supporting the setup of an international standards board.” 

Greater focus on the ‘S’ in ‘ESG’

While climate-related disclosures tend to dominate discussions, the COVID pandemic has helped make the case for a greater focus on the “S” in ESG . “In the US, ESG has been linked with diversity and inclusion and since the pandemic with all the issues around employee welfare protection, and customer protection and security and issues like privacy of data - they've all become real business issues.”

The opportunities for the accountancy profession to provide advisory and assurance services around ESG are huge, Herz believes. “It’s very much a boardroom issue. Companies need information systems to produce these metrics and they ought to have the same internal controls and disclosure controls that we have for financial information. That's one of the reasons I strongly advocate that finance and assurance people get involved in this; they understand data collection and internal controls.”

Perhaps more importantly, embracing sustainability is an opportunity for accountants to rebuild trust in the profession. “Good accounting and good information is very powerful. It affects behavior, it affects actions.” Herz refers to a speech made by the Prince of Wales at the Accounting for Sustainability forum in 2010. The Prince said that if accountants don't get involved in this and if we don't have better information, this'll be the greatest accounting failure the world has ever seen.” 

Huge progress has been made in the last decade, but there’s no scope for complacency. “We're at a tipping point where more and more constituencies and stakeholders are recognising the importance of these matters as key business issues. There's more and more movement to get better reporting.”

Despite being one of the driving forces behind international financial reporting standards convergence – Herz was a founding member of the International Accounting Standards Board (IASB) and chaired the US Financial Accounting Standards Board (FASB) from 2002-2010 – he now believes the time is ripe for the focus to shift to broader performance reporting. 

“We need to look at things that aren't captured in financial statements but that drive financial performance and value creation or destruction rather than revisiting much smaller areas of financial reporting and trying to fine tune those.” Herz is confident in the power of capital markets to help solve all sorts of issues and sustainability and broader societal issues are no exception, he says. “But in order for that to happen, they need to have the right information.”

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