Accessible expertise through global collaboration
MACD is the Supporting Partner of the global launch of the ESG Exchange with Good Governance Academy, in a global collaborative to make sustainability reporting expertise accessible.
Corporate reporting is not what it used to be
Globally, mandatory corporate reports that include data on both financial and non-financial sustainability are soon to be required. Knowledge about how to report sustainability data is scarce. In most cases, the development of new systems, business procedures and company capabilities are necessary.
The world has seen this before
These shifts bring to mind the emergence of financial accounting and financial reporting. Investopedia notes that: “Accounting is more than just the act of keeping a list of debits and credits. It is the language of business and, by extension, of all things financial. Our senses collect information from our surroundings that our brains then interpret; accountants translate the complexities of finance into information that the public can understand.” The same can be said for sustainability information – sustainability reporting is more than just the act of collecting information and reporting on it; it needs to be interpreted and translated into information that the organization’s stakeholders can understand, including the organization’s managers and other employees.
Accounting has taken several thousand years to develop
Historians point to evidence of accounting practices from over 3,000 years ago! Over the years accounting practices became standardized with elaborate systems of checks and balances. These standards developed around the world – and they were all slightly different! It is generally recognized that the US stock market collapse in 1929 was a seminal event in triggering a demand for greater standardization of accounting practices and greater transparency in reporting. The US Generally Accepted Accounting Principles (GAAP) evolved from this demand. The development of GAAP started in 1939 with the American Institute of Accountants (now the AICPA) working with the NYSE and continues to evolve as the primary accounting standard for the United States of America.
Several more decades to agree international accounting standards
The foundation for international accounting standards was laid in 1966 and resulted in the founding of the IASC (International Accounting Standards Committee) in 1973. The IASC was created by national accountancy bodies from a number of countries with a view to harmonizing the international diversity of company reporting practices. In 2001, the IASC was replaced by the International Accounting Standards Board (IASB), an independent standard-setting body which continued to develop International Financial Reporting Standards. The IASC Foundation changed its name to the IFRS Foundation in July 2010.
Corporate reporting needs more than financial accounting information
“Towards the end of the 20th century, the limited liability company was using natural assets faster than nature was regenerating them – clearly not a sustainability matter. By 1997, it became apparent that the makeup of market capitalisation of some iconic companies was changing as a result. At the turn of the 21st century only about 20% of the makeup of the market cap was reflected as additives in a balance sheet according to financial reporting standards. This led to the Global Reporting Initiative (GRI) drafting guidelines to guide corporations, and other organizations, on how to report on these incorporeal assets, intangibles, sustainability and now ESG — Environment, Social and Governance — issues.”
Professor Mervyn King, Patron of the Good Governance Academy
The world now needs to also account for ‘all things sustainability’
This is a far greater ask than ‘all things financial’. Reporting on ESG (the commonly used acronym to indicate some of the sustainability factors, Environment, Social and Governance) information is new territory for most reporting officers and many are unprepared. Reporting officers, including governing bodies and their assurance providers, are bewildered by the task ahead. With the rise in demand for this additional information, there was a commensurate rise in the number of framework providers and standard setters. Professor King gave a talk in London where he said that it was “a moral and social outrage” that standard setters saw themselves as competitors when they should all have the same outcome in mind – namely, a global comprehensive corporate reporting system. Instead of the clutter and uncertainty that were being created for preparers and users, he claimed that the world needed some consistency in this reporting. This had an impact, and soon these various organizations started to merge and collaborate. In 2021, the IFRS Foundation announced its intention to establish the International Sustainability Standards Board (ISSB) to work alongside the existing International Accounting Standards Board (IASB).
Financial accounting and reporting on their own are no longer sufficient
“Financial accounting and reporting on their own are no longer sufficient for boards to discharge their duty of accountability for long-term value creation. We need to move to a reporting system that delivers consistent, comparable, reliable, and assurable information related to enterprise value creation and sustainable development. IFAC has, therefore, supported the creation of the International Sustainability Standards Board (ISSB) under the auspices of the IFRS Foundation.”
Alan Johnson, President of the International Federation of Accountants (IFAC)
Can the world wait decades?
“We must expect that globally comparable corporate reports demonstrating corporate accountability for sustainable development will take some time to establish.” notes Prof King; but can the world wait decades for these standards to be developed and even longer for reports to be published using these standards?
This information is fast becoming critical
This information is critical for decision-making in the face of growing systemic threats to organizations and the planet alike – threats include negative impacts organizations have on the planet, including society, the natural environment, and the economy, as well as negative impacts these have on the organization’s own sustainability. Reports need to be comparable and assurable for effective investor decision making; climaterelated targets and plans need to be determined based on sound information; and national public policy needs to be developed based on data from organizations themselves, which is arguably, the largest source of current sustainability data.
Collaboration is key
Timelines can be reduced through effective collaboration. This was shown in 2020 with the rapid development of the COVID-19 vaccines and this can be done again with sustainability reporting. The Good Governance Academy, with Professor Mervyn King as its founding patron, aims to take the guesswork out of generating these reports and ensure that the necessary expertise is made accessible, globally. It has convened a collaboration of global standard-setting experts, regulators, professional bodies and associations, educators and corporates to create a much-needed baseline, a ‘How-To Playbook,’ for sustainability reporting
Collaborative provision of content and know how
ESG Exchange will provide organizations with access to the best available content and a hands-on implementation programme for all necessary organizational roles, including directors, executives, finance, audit and assurance partners, operations, IT and stakeholder / investor relations departments. The founding sponsor is Archer, an enterprise risk management solutions provider, guiding the digital convergence of ESG and Integrated Risk Management.
Organizations need to start the journey
The draft ISSB standards have been published for public comment as have those from the European Union, the European Sustainability Reporting Standards (ESRS), and the US Securities and Exchange Commission (SEC) has also proposed a climate risk disclosure rule. The final standards, rules and regulations are expected to be published in the next 3 to 5 years and organizations need to be ready.
A systematic approach is needed
Organizational impacts will be felt if these requirements are not approached systematically. As with financial information, the organization will need to source, generate and manage new data; business processes, internal controls and business intelligence will be necessary; and assurance – risk, compliance and audit – will need new competencies and standards to effectively fulfil their responsibilities. External assurance providers are scrambling – Reuters has called this “a $35 trillion-dollar conundrum for auditors”. PWC last year committed to hiring 100,000 people and investing invest $12 billion in response, KPMG later committed to investing $1.5 billion and Deloitte followed earlier this year announcing their $1 Billion investment. Organizations need to heed this call and start thinking about their investments and pivot their strategies.
Boards need to get onboard
Critically governing bodies (boards) need to be awake to these global shifts – they should be facing sleepless nights as they think about the futures of their organizations. Accountability for the long-term sustainability and success of their organizations rests on their shoulders. In their duties of accountability to their organizations, boards need to ensure that they are suitably competent and equipped to discharge their duty. It is not for nothing that the ESG acronym lands with ‘G’ for it is the very governance of the organization which will determine the success or failure of the organization, including whether the organization is able to take the opportunities presented by sustainability reporting and minimize the threats, or face declining social, investor and regulator trust.
“Sustainable development through effective corporate reporting is an imperative
for people, planet and prosperity,” Professor Mervyn King
Find out more about the ESG Exchange here.