Collaboration for Convergence On the Radar?

By Alan Willis, FCPA, FCA

I see fresh signs of hope for the future of corporate reporting even though a year ago, in an article in ThinkTWENTY20, I painted a gloomy picture of the muddling mosaic of reporting standards and frameworks facing companies that choose to report externally beyond their regular financial reports about matters in the general environmental, social and governmental (ESG) landscape – sustainability, climate change, corporate citizenship and so on. Further, I pointed out that there is a broad range of user expectations as to what disclosures are decision useful, i.e., relevant and material, to their respective needs and interests. 

For example, what is useful to long-term investors, such as pension funds, is not the same as what is sought by a variety of other stakeholders interested in, say, a company’s contributions to the UN Sustainable Development Goals (SDGs) or its impacts on natural resources and communities, or its track record on human rights and working conditions. I did, however, propose that a way forward to address these various information needs would be to develop two separate external reporting packages, drawing on existing frameworks and standards – one package primarily for investors whose aim is to optimize future portfolio returns and value,  and another for stakeholders concerned about a company’s impacts on the planet and society.

Even then, I saw a few small signs of hope on the horizon that might lead toward a redesign of corporate reporting with the two broad user groups in mind, not by inventing even more new frameworks and standards, but by drawing on, consolidating and integrating existing ones. I even suggested what this might look like. But I questioned whether the principal actors in this space – the “owners” of the existing frameworks and standards – were truly willing to collaborate in such a process, rather as the Global Reporting Initiative (GRI) and Accounting for Sustainability (A4S) agreed in 2009 to collaborate in advancing integrated reporting by creating the International Integrated Reporting Council (IIRC ).

Challenges to Progress

Aside from the importance of following due process in any such undertaking, a key challenge was then – and is now – to choose or create an appropriate convener of the parties needed at the table to design an overarching reporting architecture and coordinate task forces to carry out the convergence of existing frameworks and standards into the two reporting packages suitable respectively for investors and other stakeholders. A further challenge, especially for the investor package, is for users (and companies themselves) to be able to gain insights into the relationships or connectivity between ESG or sustainability performance and financial performance.

Finally, there would need to be global uptake of these reporting packages. For sustainability reporting to stakeholders in general, there has already been broad global uptake of the GRI Sustainability Reporting Standards since their inception in 2000. These would need to be subjected to further enhancement to accommodate stakeholders’ evolving expectations and the continuing emergence of measurement and disclosure methodologies necessary to report corporate impacts on society and the planet (plus contributions to the UN Sustainable Development Goals), to indicate linkages with financial performance and economic wellbeing, and to enhance Sustainability Accounting Standards Board (SASB)-style industry sector comparability. Conversely, disclosures about the present and future impacts of external environmental and social factors on a company, and how these are anticipated and managed, would need to be considered.

Keys to Advancing Disclosures in Capital Markets

To achieve global, even regional, uptake of the investor reporting package, alongside a company’s International Financial Reporting Standards (IFRS) or the US’s Financial Accounting Standards Board (FASB)-compliant financial statements, could be rather more challenging. Company reporting statutes, directives, securities regulations and stock exchange listing requirements vary widely among continents, geo-political regions and national jurisdictions. Three possible keys to these potential impediments are, first, the possibility that what is known in North America as the MD&A (Management’s Discussion and Analysis), which is called for by securities regulators to accompany financial statements in annual filings, could be the document in which companies are required to locate and disclose (as now, in theory) all material investor-relevant information. Indeed, the SASB standards were developed with this in mind after the SEC’s 2010 interpretive release about climate-related risks and uncertainties.

Likewise, at an international level, there is the possibility that the International Accounting Standards Board (IASB)’s Practice Statement on Management Commentary (MC), currently under revision, could not only be enhanced to explicitly require material investor-relevant information – namely what I call “the investor reporting package” – to be disclosed within the MC, but be made an essential adjunct to or component of IFRS, not, as now, a voluntary statement outside of IFRS. After all, the MD&A and the MC were devised originally as a vehicle for providing supplementary context for understanding what financial statements do and do not reveal, to report “through the eyes of management.” 

The second key would be for the International Organization of Security Commissions (IOSCO) to issue a statement to all its member securities regulatory bodies calling on them to incorporate the “investor reporting package” in their mandatory periodic company filing requirements. This would not necessarily be binding as such in every country and jurisdiction, but would certainly be a persuasive message, especially if backed up by strong investor endorsements.

The third key would be for stock exchanges worldwide to call for the investor package in their listing requirements, just as now occurs in South Africa with regard to integrated reporting necessary for compliance with the King IV code for corporate governance. A unanimous vote for this by members of the World Federation of Exchanges would be a great step in this direction.

What Other Fresh Signs of Hope Do I See on the Radar? 

In December 2019, Accountancy Europe issued a consultation paper on “Inter-Connected Standard Setting for Corporate Reporting,” to build “the case for global interconnected standards to address non-financial information on topics such as climate change, environmental degradation, human rights and social concerns.” The analysis of feedback on this, published in June 2020, offers suggestions for a building block path forward to a global reporting structure – ideally global, but least useful in the EU where, in July 2020, the EU Commission issued a mandate to begin to develop “Non-Financial Reporting Standards” for incorporation into a revised Non-Financial Reporting Directive applicable in all EU countries.

In January 2020, the International Business Council (IBC) of the World Economic Forum (WEF) published a consultation paper, “Toward Common Metrics and Consistent Reporting of Sustainable Value Creation,” integrating under four broad pillars the disclosures called for in many current frameworks and standards, including those set by the GRI, SASB and The Task Force on Climate-related Financial Disclosures (TCFD). Interestingly, this paper was developed by the four main global accounting firms and supported by major companies that comprise the IBC. We await word on the future progress of these proposals. 

In November 2019, the International Federation of Accountants (IFAC) published a new paper “Enhancing Corporate Reporting,” with the announcement that “IFAC CEO, Kevin Dancey, highlights the importance of professional accountants leading on new ways of thinking about reporting value and the role of business in society. He also discusses the opportunity of convergence and integration of corporate reporting and how integrated reporting offers a foundation for reporting that is aligned with the evolving needs of business.” Since then, IFAC has commented supportively on both the Accountancy Europe and WEF/IBC initiatives mentioned above (as well as providing concrete feedback on the former’s consultation paper).

Meanwhile, the Better Alignment Project of the Corporate Reporting Dialogue (CRD) convened by the IIRC has done important mapping work on CRD participants’ reporting standards and frameworks, clearly indicating high degrees of alignment among them, but stopping short of proposing how the participating bodies’ frameworks and standards might eventually converge and be integrated into a single user-friendly (and preparer-friendly) reporting package.

Next we must note that the IIRC itself is currently in the midst of a process to revise its December 2013 Integrated Reporting Framework by the end of this year. The proposed revisions under consideration are important but few and relatively minor. To date, the number of companies worldwide producing integrated reports as called for by the Framework is modest at best, in fact few in North America. The fundamental concepts and guiding principles underpinning the IR Framework and its Content Elements contribute, however, a unique and powerful lens for understanding how a company creates value for its stakeholders, including investors, and the impacts it has on the resources (“capitals”) it draws upon to create value. Truly a model for integrated thinking about business models, strategy, risk and value creation! Any future work on converging reporting standards and frameworks needs to be informed, if not harmonized by, the fundamental concepts, guiding principles and systems thinking embedded in the IIRC’s Framework.

More Good News

Finally, and most recently, we have seen the following:

  • On July 13, 2020, a remarkable and welcome announcement was made jointly by the GRI and SASB to collaborate “in promoting clarity and comparability in the sustainability (reporting) landscape.” This recognizes that the GRI and SASB provide “compatible standards for sustainability reporting, which are designed to fulfill different purposes and are based on different approaches to materiality” – those of different types of stakeholders. 
  • The latest issue of The Ambachsteer Letter(July 1, 2020) calls for asset owners (primarily investors that are major public pension funds) first to support efforts to “consolidate, simplify, and innovate” in “the journey towards a single, focused, effective organizational reporting framework” and, second, to lead the way in the adoption of the IIRC’s Integrated Reporting Framework as a means of structuring the various elements of narrative reporting about value creation, accompanied by clusters of metrics based on existing measurement and disclosure standards, such as those of the GRI and SASB.

The GRI-SASB commitment to collaboration, together with wider uptake of integrated reporting, represents the best chance we have to date for reducing the complexity and confusion of multiple standards and creating a consolidated architecture of reporting and disclosure rules that will not only make life so much easier for companies, but also result in (a) investors and (b) stakeholders in general readily obtaining from companies’ external reporting the information most relevant to their respective needs.

My earlier questions still remain, however, as to whether the necessary actors, besides just the GRI and SASB, will collaborate as needed, who will convene and orchestrate this work, and how the outputs of this collaboration will succeed in achieving the essential uptake by companies and all other interested parties. 

Achievement of the UN SDGs by 2030, including action on climate change, inequality and disease, depends on the wide availability of reliable, relevant and comparable corporate data in the near future for use both within companies and in their external reporting. Impacts of the COVID crisis and today’s worldwide focus on racial and gender inequalities have proven to be remarkable new catalysts for collaborative action on corporate disclosures about global issues that affect companies in hitherto unrecognized ways.

Future blogs will look more closely at some of the fresh new signs on the radar, and what collaborative progress is being made towards convergence.