Setting the stage for deeper integration between sustainability-based and financial reporting could be a key mission for the International Sustainability Standards Board (ISSB) over the next two years, according to a new consultation.
Launched on 4 May and open until 1 September, the consultation is seeking stakeholders’ thoughts on four potential initiatives that the ISSB is mulling as priorities for its next work plan – including a project to research integration in reporting.
Synergies and trade-offs
In its discussion paper, the ISSB explains that its umbrella body, the International Financial Reporting Standards (IFRS) Foundation, is working towards creating an “integrated, coherent and comprehensive” system of corporate reporting that provides a “holistic and transparent” view of how an entity creates value over time.
It says the ISSB has already made significant efforts in the wording of its standards to facilitate ‘connectivity’ between sustainability-focused financial disclosures and reporting provided in financial statements.
However, the discussion paper notes, integration takes that concept a step further – encompassing a consideration of interdependencies, synergies and trade-offs between the various resources and relationships that an entity divulges in general purpose financial reports, and how the value that an entity creates for itself and its investors is inextricably linked to that which it creates for other stakeholders, society and the natural environment.
“Integration in reporting can ensure that connections between financial and sustainability performance are explicitly, efficiently and effectively communicated in a manner that is more easily understood by an entity’s investors,” the discussion paper says. “A more cohesive and efficient approach to corporate reporting improves the quality of information available to investors to enable a more efficient and productive allocation of resources.”
In addition to the workstream around reporting, the consultation unveils proposals for three further research projects in the arena of sustainability, focusing on:
Biodiversity, ecosystems and ecosystem services: Changes in this area are likely to have an impact on entities’ sustainability-related risks, the discussion paper notes. When ecosystem functions are degraded, that heightens risks for the entities that depend on them.
Human capital: Institutional investors around the world are increasingly seeking information on human capital management in making investment decisions. Consequently, many entities are seeking clearer guidance on how to prepare more effective disclosures on the topic.
Human rights: As international economies become more interconnected and supply chains more complex, entities are increasingly challenged to manage risks around human rights. That creates risks for entities that do not have in place appropriate due diligence practices.
Focusing on the reporting project, Luma Saqqaf, CEO at UAE-based Ajyal Sustainability Consulting, says that there are “rightly” big concerns among environmental, social and governance (ESG) specialists about when integration is going to happen.
“We need to find a common language between all parts of every organisation,” Saqqaf says, “to ensure that the sustainability approach truly reflects the strategy of the company. When we consider the ESG challenges that businesses are facing, those two areas must be coherent.
“Once you have this common language, which the ISSB integration is proposing, everybody within the organisation can row in the same direction. For example, a chief sustainability officer would better understand what the CFO is doing, and vice versa,” Saqqaf adds.
The longer it takes to enable that mutual understanding in organisations, the more it will hamper the development of sustainability, she warns, to the detriment of organisations, entire industries and economies.
Saqqaf is not convinced that a delay on integration will spawn further greenwashing. “If you want to greenwash, you’ll do it anyway,” she says. However, a common language would offer benefits. “Sometimes instances can be unintended when measures are put in place without having been thought through. So, having a common language through integration should, in theory, reduce the possibility of greenwashing.”
Saqqaf says it’s hard to say whether companies are stalling on sustainability reporting because of a current lack of integration. “But if they are, a key reason will likely be because they’re not sure which strategy to enforce, because the differing parts of the organisation don’t understand each other. This is where integration can only help to remove any excuses.”
ICAEW Technical Manager, Corporate Reporting, Laura Woods says: “We welcome the publication of this important consultation from the ISSB. Engaging with stakeholders at an early stage is critical when it comes to getting the balance of activities right in the coming years and will help influence the future direction of sustainability reporting.”
Wood also welcomed moves by the ISSB to seek views on a potential project on the integration of reporting. “A fundamental advantage of establishing the ISSB under the umbrella of the IFRS Foundation is the ability to harness the natural link between sustainability and financial reporting. Ensuring connectivity with the International Accounting Standards Board (IASB) is something we feel to be a crucial element for the ISSB as it moves into its next phase of standard setting.”
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