Time For Mandatory Sustainability Disclosures

    Stockholm (NordSIP) – From increasing demand for ESG ETFs to a rising chorus of governments and companies setting net-zero CO2 emission targets, the tide of sustainability appears unstoppable. Among the most recent such insights, KPMG’s Survey of Sustainability Reporting 2020 found that 80% of the 5,200 leading companies across 52 countries now voluntarily undertake sustainability reporting. In what may be seen as a tipping point, standard-setting bodies are taking steps to join the fray.

    Motivated by the increased demand for sustainability standards from both investors and corporations, the International Financial Reporting Standards (IFRS) Foundation published a consultation paper on sustainability reporting in September 2020. Ahead of the consultation’s December 31st deadline, the Global Reporting Initiative (GRI) has published its response to the consultation.

    The IFRS and its Proposal

    The accounting standards published by the IFRS Foundation are the norm in 140 countries, including all EU member states, Australia, Brazil, India, Hong Kong, Singapore, India and South Africa, but not the USA. The involvement of the IFRS Foundation, through its standard-setting body, the International Accounting Standards Board (IASB), is a member of the Corporate Reporting Dialogue (CRD) and of the Task Force on Climate-related Financial Disclosures (TCFD) established in 2015 by the Financial Stability Board.

    The original consultation paper is motivated by the perception that the IFRS’s standard-setting expertise and its collaboration with governments, regulators and national standard-setters could be used to decrease the level of complexity and achieving greater consistency in sustainability reporting.

    In the document, the IFRS proposes the creation of the Sustainability Standards Board, to become a standard-setter working with existing initiatives. Among other things, the IFRS consultation paper lays out mandatory disclosure to ensure transparency on corporate contributions to global challenges. It also describes a governance structure, relationship guidelines with other organisations, scope of actions and presents the public with 11 questions to guide its future work on this theme.

    The Need for Mandatory Disclosure Requirements

    Of the top 5,200 companies reviewed by the KPMG that voluntarily undertake sustainability reporting, 67% use GRI standards. Of the top 250, 75% use GRI’s standards. As one of “the provider of the most widely used sustainability reporting standards, adopted by a majority of large companies around the world”, the GRI believes it can provide unique insight into the issues at hand.

    “GRI sees IFRS as a crucial partner in ensuring a seamless link between financial and sustainability reporting,” Eric Hespenheide, Chairman of GRI, says in a statement. “Therefore, we fully support the IFRS Trustees in their objective to improve financial reporting so it is inclusive of the financial risks and opportunities presented by a company’s sustainability impacts.”

    “The interconnection between financial and sustainability reporting deserves particular attention by the IFRS, and is an area I believe we can closely collaborate on. It is essential to limit the burden on businesses while at the same time ensuring enhanced reporting that illuminates corporate impacts,” Hespenheide explains.

    Having experience and some success with voluntary schemes, the GRI’s response recommends the implementation of mandatory sustainability reporting to overcome the consistency, comparability, transparency and quality created by these voluntary arrangements.

    “Improved depth and quality of reporting can only be realized when financial and sustainability reporting are on an equal footing – with mandatory disclosure requirements for both,” Hespenheide adds.“Furthermore, we cannot achieve the UN Sustainable Development Goals, the EU Green Deal, or other regional and global commitments, without accounting for the contribution of companies.”

    “GRI’s vision is of a sustainable future that is supported by global sustainability reporting standards, which inform all stakeholders – from investors through to civil society, policy makers, labor unions and others. We stand ready to work with the IFRS Foundation to achieve this aim,” Hespenheide concludes.

    Going a step further, the GRI suggests that not only should companies be forced to conduct sustainable reporting, these reports should be auditable. “Under the GRI Standards, companies are required to report their approach to external assurance,” the report says.

    The intitative also argues in favour of a new corporate reporting regime to put financial and sustainability reporting on equal footing. GRI will work with the IFRS Foundation and others to realize this transition, including undertaking joint standard-setting efforts.

    The IFRS consultation paper, is open until 31 December. Click here for more information from the IFRS

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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