There currently exists a wide range of frameworks around the world that aim to help organisations report on environmental, social and governance (ESG) matters. These initiatives have emerged and evolved over time, often approaching ESG reporting from a particular perspective. While there is some overlap between the various ESG reporting initiatives, there is no single framework that offers the complete package. The result is a confused and fragmented landscape, which has arguably contributed to what is referred to as greenwashing, a situation where companies and other organisations can be selective about how or what they report. So where do we go from here? In this article I examine how stakeholders are starting to grapple with the difficult task of bringing greater cohesion and order to ESG reporting, and consider what the future might hold.
Moving towards a single framework
The idea of a developing a single framework for non-financial reporting is not new. For a number of years those in favour of this approach have advocated the development of a single principles-based framework that could provide direction on non-financial reporting. This framework could be used as the foundation for a common language and consistent measurement bases, with perhaps detailed practical guidance on a sector-by-sector basis on common key performance indicators and their link to strategy and performance.
However, progress so far has been slow. This is perhaps not surprising given the practical challenges involved. But, more fundamentally, there are those that believe a more measured pace of change is in fact desirable. The argument for this is that we should encourage experimentation, allow best practice to emerge and avoid introducing standardisation too soon in the evolution of non-financial reporting practices.
While these concerns warrant proper consideration, in the meantime pressure to improve the ESG reporting landscape has been mounting rapidly. Already in 2020 we are seeing signs that moves towards greater cohesion might be on the horizon. Two of the clearest examples of this are discussed below.
Accountancy Europe
Accountancy Europe recently issued the Cogito paper Interconnected standard setting for corporate reporting. The paper sets out four possible approaches to interconnected standard setting, but concludes that the development of a global reporting structure would be the preferred option.
This global reporting structure would involve the creation of a global framework for non-financial reporting standards, set by a new standard setter, which, alongside the International Accounting Standards Board (IASB), would be governed by an enhanced version of the current IFRS Foundation and its Monitoring Board.
European Commission
In January 2020, the European Commission’s Executive Vice-President announced that the European Commission (EC) would support a process to develop European non-financial reporting standards. Soon after, the EC issued a public consultation on the EU Non-Financial Reporting Directive, seeking views on a number of matters, including whether a European non-financial reporting standard should be developed and, if so, which existing frameworks could be used as a basis for such a standard.
Global versus regional
The Accountancy Europe and EC approaches demonstrate two possible solutions to developing greater cohesion in ESG reporting – global and regional. Each has its own merits and drawbacks, and it may be that the path to cohesion falls somewhere in between. Although the final outcome is not clear, what is apparent is the real sense of urgency and backing from stakeholders to start work on finding a solution sooner rather than later.
Interconnectivity with financial reporting
Putting the development of non-financial reporting standards aside for a moment, another important factor in the move towards greater cohesion in ESG reporting is the link between non-financial information and the numbers and disclosures in the audited accounts.
Last year, the IASB issued an important article on IFRS Standards and climate-related disclosures explaining how climate change risk (and other emerging risks) might be material to investors and so should be integrated into IFRS financial reporting. It sets out how the financial implications of climate change might affect things such as impairment calculations, the useful life of assets, valuations and provisions.
Similarly, the Financial Reporting Council (FRC) this year announced that it will be undertaking a major review of how companies (and auditors) assess and report on the impact of climate change.
Both the announcement from the FRC and the IASB’s article emphasise how companies need to consider emerging environmental and social risks in the context of their financial statements, as well as within their non-financial reports. It also demonstrates a growing interest from regulators in how companies are reporting on these matters, which might in turn focus minds further in this respect.
Actions speak louder than words
Finally, although it may seem an obvious point, it is important to keep in mind that the quality of reporting is often influenced by how an organisation is assessing and integrating ESG factors in relation to its business processes and strategy. Where they have been properly considered and integrated, the reporting tends to flow as a matter of course.
Similarly, the extent to which information is shared within organisations is key. Yet often there appears to be a disconnect between those focused on sustainability matters and those preparing the accounts, which then becomes apparent in the public reporting.
While there are clearly challenges to overcome in creating greater cohesion in the overall ESG reporting landscape, there may be steps that organisations can take now to improve cohesion internally when reporting on ESG matters, within both their non-financial and financial reports. Such steps would be welcomed by investors, and many others.
ESG reporting frameworks and initiatives
Some of the key frameworks and initiatives for ESG reporting (not including mandatory reporting that may be required by law, for example, within the strategic report or directors’ report in the UK):
- TCFD - Task Force on Climate-related Financial Disclosures/Corporate/Images/technical/corporate reporting/by all accounts/BAA July 2020/BAA_July2020_covid CDSB - Climate Disclosure Standards Board
- SASB - Sustainability Accounting Standards Board
- GRI - Global Reporting Initiative
- IIRC - International Integrated Reporting Council
- IASB - Management Commentary Practice Statements
- NCC - Natural Capital Coalition
About the author
Sarah Dunn, Technical Manager, Financial Reporting Faculty
