A new resource on icaew.com, Connecting sustainability and finance, identifies and explains, among other things, how and why connectivity is essential to evolve corporate performance and reporting efficacy. It is the first publication in a series unfolding over the next few months that will explain and illustrate the practical journey for companies – and others – in connecting finance and sustainability processes, data and information.

The truth of the matter is that the accountancy profession is best placed to take the lead on connecting the dots between sustainability and finance information, performance and disclosures. For those of you still wondering why the profession should lead, it is simple – we have a natural, transferrable skillset with data management, governance, internal controls, risk management, performance management, analytics and reporting. Without these skills organisations will not be able to undergo the integrated and transformative changes necessary to operate a sustainable business model for people, planet and profit.

This journey ironically starts at the end, by understanding the difference between reporting and disclosure, and then working backwards to understand how annual reports must evolve.

Defining reporting

In this article, financial reporting is considered to be the process of measuring performance according to a prescribed set of accounting and reporting standards, usually through formats such as the balance sheet, income statement and statement of cash flows. Reporting may, of course, take on more fluid forms depending on the needs of the user, in particular internal user requirements.

Sustainability reporting is broadly defined as disclosing performance on sustainability issues, as prescribed by sustainability reporting standards, most relevant to risk, return and value. Sustainability reporting objectives are not inconsistent with those of financial reporting. But at their core, both financial and sustainability reporting generate performance information that is prepared for decision-making purposes, either for internal management or for external users. When reporting information is shared externally it becomes a disclosure.

Defining disclosure

Disclosing information is the process of converting internal performance information into a digitally-structured, external output and format. Corporate disclosure is, therefore, effectively the act of providing relevant and reliable financial or sustainability performance information to external stakeholders. It may be useful to think of disclosure as a subset process of reporting, the former of which is defined by regulatory bodies. A tangible disclosure benefit is the ability to hold companies to account for their performance results, and by extension their decisions and actions.

With these definitions in place, we can now look at how annual reports need to evolve to meet growing information demands.

The journey towards connected reporting

Understanding the connectivity between finance and sustainability requires the right mindset. A relatable analogy is the way of thinking that allows an individual to see multidimensional connections, relationships and implications. As finance professionals we are trained to think in multidimensional ways to understand complex accounting transactions, forensic accounting, auditing and more. It is this particular skillset we need to bring to the fore now to meaningfully drive connectivity between finance and sustainability.

To illustrate this multidimensional mindset, consider a concrete manufacturer for example. Its principal product depends on water, but water scarcity is becoming a growing concern, including within areas previously immune from water shortages. A sustainability practitioner tends to focus on access to water, water consumption and how to manage this resource responsibly.

A financial accountant, on the other hand, tends to think in terms of ‘going concern’, including, for instance, how the company might consider R&D investments to develop a new lower cost concrete product formulation, or how a tax on water consumption might affect the company’s costs and, therefore, profitability.

Both are valid perspectives albeit disconnected from one another, where decisions within one functional area may inadvertently create issues in the other.

Connectivity in the annual report would simultaneously, and collaboratively, connect the two domains from multiple dimensions as shown in the table below.

Connectivity in action: concrete manufacture’s dependency on scarce water

_{Note: considerations and connections are intended to be illustrative not exhaustive}

Takeaways for corporate reporting

Information is presented in various ways and locations, reflecting the fact that what it conveys differs. Connectivity is about knowing and then explaining how the different pieces of information are connected, how sustainability performance can affect actual financial performance and prospective financial performance.

Connectivity is about deriving value from the ability to manage in real time the operational risks and opportunities that an organisation faces to optimise both their financial performance outcomes and the effects they are having on the environment and people in areas within which they operate. 

Our role as professionals is to clearly bring this story to life through the annual report and its associated elements for the benefit of users. 

Co-authored with ESG subject-matter expert and advisor, Marie-Josée Privyk, the full connecting sustainability and finance publication can be viewed here.

David Wray, ACA, transformation expert and author