How can existing reporting systems be leveraged to meet emerging sustainability needs? With new global sustainability standards imminent, we explore this opportunity in more detail.
Emmanuel Faber and Andreas Barckow, the respective Chairs of the International Sustainability Standards Board (ISSB) and the International Accounting Standards Board (IASB), recently released a joint statement, 'Connectivity—what is it and what does it deliver?'.
The International Financial Reporting Standards (IFRS) Foundation is the governing body for both the ISSB and its older sibling, the IASB. It recognises the importance of supporting the two standard-setters in providing guidance to organisations on the disclosure of information that is material to investment decisions. While traditionally, the focus has been on standards for the disclosure of purely financial information, general sustainability and climate-related issues are now acknowledged as material to an enterprise’s long-term value and should be reported in an ongoing manner.
What is connectivity?
In a nutshell, connectivity is about the integration of two seemingly disparate concepts in pursuit of holistic corporate communication.
According to Faber and Barckow, "The ultimate outcome of connectivity is holistic, comprehensive and coherent general purpose financial reports" which strongly aligns with the message we've been conveying for some time now.
The ISSB and IASB view connectivity from two perspectives: product and process. The standard setters consider their products to be the "Standards and digital taxonomies that facilitate digital reporting", integrated across different content.
By design, the standards they produce will be consistent in phrasing and concepts. This provides report producers with a consistent platform to base their disclosures on, giving the end user a complete and comparable picture of the organisation with 'no gaps or unintended overlaps'.
Without the level of collaboration and engagement seen between the IASB and ISSB there was great risk of uncertainty, inconsistency and confusion, with the associated administrative burden for businesses and sub-optimal decision making by investors and stakeholders.
What does it mean for businesses?
To date, much of Australia's sustainability-related disclosure activity (or inactivity) has been driven by basic compliance requirements. For now, sustainability reporting outside of regulatory approvals remains largely voluntary. However, as the ISSB prepares to release the new standards, IFRS S1 - General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 - Climate-related Disclosures, we expect sustainability and climate-related financial reporting to soon become mandatory for certain Australian organisations.
Many of the concepts behind IFRS S1 and S2 may appear new to the accounting profession normally charged with preparing financial statements. And this may seem daunting initially. On the other hand, the accounting standards set by the IASB have been long established and are widely accepted internationally as the framework for providing investor information. They are known and understood by both preparers of general purpose financial reports and the consumers of those reports.
But thanks to the drive for ‘connectivity’ between the ISSB and IASB, there should be familiarity in the structure and approach of S1 and S2, even if not in the subject matter. So, when considering how to publish an organisation's sustainability and climate-related reports, drawing on knowledge of the broader general-purpose financial reporting principles and requirements will be a great foundation, as will a strong focus on the intended audience.
Subject matter expertise will also be critical to support sustainability and climate-related disclosures. Just as tax issues will require a taxation specialist, or payroll matters will require input from a payroll specialist, businesses should seek input and advice from specialists in the fields of sustainability and/or climate to mitigate against the possibility of false or misleading statements.
It is also important to consider the structure and location of any sustainability and climate-related disclosures. For example, in a corporate report, an organisation might include its:
- Chairperson's report
- Financial statement
- Sustainability report,
- Directors’ report, and
- Remuneration report.
Not all components of this hypothetical corporate report need to be subject to audit, and assurance requirements for S1 and S2 are still being resolved. However, if you were to place the sustainability report in the financial statement – it could force your hand in requiring an audit for the sustainability component too.
Who needs to get up to speed?
Board members have indicated that environmental, social and governance (ESG) issues hold an important space on the board agenda. While expectations differ in who is ultimately responsible for driving ESG initiatives, sustainability is ultimately seen as a whole-of-business issue to address.
Following the lead of the ISSB and the IASB, the ability of sustainability, finance and risk leaders, in particular, to work together will be paramount. Bringing together the finance team's experience in applying the IFRS standards, the sustainability team's deep knowledge of environmental, social and governance issues, and the risk team's risk assessment and management application will be key to successfully implementing sustainability reporting in organisations across Australia.
Where to from here?
We'll further explore connectivity and integrated reporting in our upcoming insight series, Bridging the gap between sustainability and financial reporting.
In the meantime, to discuss the imminent sustainability standards and what connectivity might mean for your organisation, don't hesitate to contact a sustainability team member.