Senior Counsel, Supreme Court of South Africa
In 2009 at a meeting at the United Nations headquarters in Geneva it was agreed by global institutional bodies that although financial reporting was critical, it was no longer sufficient to discharge the duty of accountability, because some 80% of the make-up of the market capitalization of companies now consisted of intangible assets which were not additives in a balance sheet according to financial reporting standards.
Sustainability reporting was gathering momentum in a resource constrained world but companies reporting in two silos - one financial, one sustainability - were actually reporting in a manner divorced from the way companies operate. Financial capital is not separated from natural capital or the latter from intellectual capital, including the relationships between the company and its stakeholders. These capitals and relationships are integrated on a daily basis.
This led to the establishment in 2010 of the International Integrated Reporting Council and the issue of the International Integrated Reporting Framework in December 2013 with input from iconic companies and professionals from around the world.
The concept promoted was integrated thinking. One can describe it as a symphony between the resources used by a company and its relationships with its stakeholders in producing its product, known as its output in the value creation process developed in the <IR> Framework.
Accountants today have to make sure that the way that the company makes its money and its impacts on the three critical dimensions for sustainable development, namely the economy, society and the environment, are all accounted for, be they value creation, preservation or erosion. That is why the chief financial officer does not only focus on the financial but has a focus today on the value creation process and should rather be known as a chief value officer than a chief financial officer.
The board of directors, meeting say six times a year, are the most informed body of persons about the financials, the sustainability issues, as well as the challenges and uncertainties facing the company in developing its business model and achieving its strategic purpose.
To discharge the duty of accountability, the board has to spend more time understanding the financial and sustainability reports, the latter having been filled with information as a result of the internet. This plethora of information that comes into companies sometimes causes knowledge to be lost in information. In the ESG cluster of reporting frameworks there should be a convergence of framework providers and commonality in the standards developed by them. After all they are dealing with public interest issues and are trying to achieve the same public outcome – accountability on ESG issues.
The purpose of the GRI and SASB is to endeavour to have the 21st century being one of sustainable development as opposed to the 20th century, which was one of unsustainable development with a focus being on the primacy of the shareholder.
Towards the end of the 20th century it was known that in the main, companies were using and had used natural assets faster than nature was regenerating them. Clearly not a sustainable manner of carrying on business. Consequently, a need arose to report on critical sustainability issues and the Global Reporting Initiative was launched in Boston in 1997. It moved to Amsterdam at the beginning of the 21st century and now, in October 2020, it has a mass of accumulated knowledge on sustainability reporting and through a civil society lens is the gold standard.
As the sustainability reporting space became more and more important, many framework providers on critical sustainability issues were founded. This led to the ESG cluster becoming cluttered and confused for a preparer and the framework providers were seeing one another as competitors. This was contrary to social interests because they were all dealing with public interest issues with the same public good outcome, namely to make reporting more informed so that the user could make more informed assessments about the long-term health of a company.
As a result, the IIRC started the Corporate Reporting Dialogue where several of the framework providers in the ESG cluster met to see whether there could be convergence of the standards developed by these providers. At the IIRC’s international conference in 2019, I said that it was a social outrage that framework providers in the ESG cluster saw themselves as competitors when they should rather be collaborators because they were dealing with public interest issues and were being funded from the same social pond. A clarion call went out globally for framework providers in the ESG cluster to collaborate, particularly having regard to SDG 17, which is about co-operation and collaboration.
In September and October 2020, there has been a marked movement towards creating a comprehensive corporate reporting system. This movement has been joined by the IIRC, who is ensuring that the principles of integrated thinking and reporting are embedded into such an international system. To this end the IIRC started discussions with major framework providers in the ESG cluster and was party to issuing a statement of intent to work together towards such a comprehensive corporate reporting system. This statement was issued by the CDP, CDSB, GRI, SASB and the IIRC. These five collaborators have now sent an open letter to IOSCO about collaboration with their task force on sustainable finance.
IFAC has called for the creation of a new Sustainability Standards Board (SSB) which would exist alongside the International Accounting Standards Board (IASB) under the IFRS Foundation. IFAC also notes that financial and non-financial information should be connected through a conceptual framework and that integrated reporting principles and the work of the TCFD should serve as a starting point.
IOSCO has said that it will engage with the five collaborators in an endeavour to create “an effective system for reporting in order to safeguard the public interest in any future framework for ESG disclosure.” IOSCO expects that any work together with the five collaborators would join in with the work of the IFRS Foundation and that "taken together, these steps may lead to the foundation of a structure that can deliver a more coherent and comprehensive corporate reporting system."
Further the European Commission gave the European Financial Reporting Advisory Group (EFRAG) a mandate to work on possible EU non-financial reporting standards. In this regard the Advisory Group has indicated its intent to work together with existing framework providers and standard setters.
And most recently, the IFRS Foundation has published a Consultation Paper to assess the demand for a global sustainability standards board. The IFRS Foundation, made up of public authority members in its monitoring board, and with years of maturity in standard setting, coupled with communication and relationships with regulators and governments in 144 jurisdictions, can play a meaningful role in the development of an international sustainability standards board.
Consequently, the year 2020 with the S in ESG being highlighted because of the pandemic and the thoughts of a comprehensive corporate reporting system being brought from the byways of the minds of the leaders of the various bodies referred to above, to the highways of their minds is resulting in an inexorable movement towards the creation not only of an international sustainability standards board but a value creation reporting system. The framework providers in the ESG cluster are now collaborating and the bodies who have entered this drive for the establishment of a sustainability standards board to remove clutter and confusion for the preparer and to improve comparability are commendably inclining towards collaboration. The IFRS Foundation should lead the charge because of its public authority membership, its maturity in standard setting and its relationships with regulators and governments around the world.
Even with the creation of a comprehensive reporting system, there will always be a need for the most informed body of persons about a company, the board, to spend more time understanding the financial and the sustainability report. The board needs to point out in clear, concise and understandable language and not in IFRS or SSB speak, what are the material financial and sustainability matters and inform the user, from an outlook point of view, of the challenges and uncertainties facing the company in achieving its business model and its purpose.
In regard to the establishment of a SSB the IFRS Foundation, with the collaboration of the other bodies mentioned above, does not have to reinvent the wheel. If this was a corporate issue, the IFRS Foundation should acquire the five collaborators and would immediately have the skill to establish a sustainability standards board and the skill to ensure that a board has principles and content elements to integrate the financial and the non-financial aspects.
The IIRC, like the GRI, is a pioneer but in integrated thinking and doing an integrated report. It has a decade of accumulated knowledge and experience and has national bodies around the world. The GRI also has such national bodies. They, together with the IFRS Foundation’s relationships with regulators and governments in their jurisdictions would give the proposed SSB an immediate international spread.
This collaboration between standard setters and the inclination for collaboration amongst world bodies has driven inevitably to thoughts of merger. The merger of SASB and the IIRC, for example, will see a value creation entity where the intellectual capital of the IIRC involving integrated thinking and doing an integrated report will be promoted globally and strengthened by its national committees around the world. Both SASB and the IIRC need to be congratulated on being far sighted on the merger. The GRI also needs congratulations for continuing its collaboration with SASB in an endeavour to achieve “interoperability” between their two standards. The push must be towards a single comprehensive system of reporting with integrated thinking at the heart and an integrated report being the lifeblood of accountability. There must be a facilitation of the connectivity between the financial and the non-financial in the public interest.
The IIRC can be proud that it has been one of the drivers for collaboration in the ESG cluster and for a comprehensive corporate reporting system.