The ultimate goal is to make companies accountable for their role in helping to tackle urgent global environmental and social issues.
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It has been one of the biggest reporting headaches for companies in recent years – where, how and what to report for their sustainability disclosures. The confusion has grown year on year as companies wrestle with the alphabet soup of sustainability acronyms and try to not only meet regulatory standards, but to also be industry-leading reporters. So, it comes as no surprise that there has been a huge appetite to create a framework for non-financial reporting that is standardised and useful to decision making.
Some good news (finally!) has emerged to help give companies some clarity around the future of the sustainability reporting landscape – the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC) are to merge into one organisation by mid-2021, to form a new Value Reporting Foundation, which will offer investors and companies a comprehensive corporate reporting framework to drive global sustainability performance. As the FT phrased the announcement, “The ESG ‘alphabet soup’ sheds a few letters”.
More consolidation on the horizon
It is becoming increasingly clear that the future of ESG reporting is set to become more stringent and it is being driven by the current investor thirst for a huge improvement in the quality of sustainability-related disclosures, to help truly understand the future financial long-term risks and opportunities.
Key to this is the standardisation of sustainability reporting. The first step on this journey came when the SASB announced a formal plan to work with the Climate Disclosure Project (CDP), the Climate Disclosure Standards Board (CDSB) and the Global Reporting Initiative (GRI) on a unified disclosure regime, and there are also rumours that the CDSB has already started talking about integrating with the Value Reporting Foundation.
Creating a standardised approach to reporting is also endorsed by the Financial Reporting Council (FRC)which has previously declared its support for the development of a global standard to ensure consistency and comparability of reporting over the longer term. See more on this in our recent blog about the future of reporting.
In the interim, the FRC recommends companies should voluntarily report against the Task Force on Climate-related Financial Disclosures (TCFD) recommended disclosures supported by the SASB metrics for their sector, following the UK Chancellor’s announcement that the UK will become the first country in the world to make the TCFD aligned disclosures fully mandatory for UK-listed and large private companies by 2022.
“This should be music to the ears of investors that have grown weary of the bickering in the ESG world. And even if these groups don’t all continue playing nice, it seems inevitable — especially with the powerful International Financial Reporting Standards (IFRS) Foundation getting involved — that unified disclosure standards are closer than ever,” Billy Nauman, FT.
The importance of simplicity and materiality
It might seem obvious, but with less ambiguity, the easier it is for companies to understand what decision-useful disclosures to report, ones that are meaningful to their stakeholders. Here are three other reasons why a more simplified approach to reporting will improve the quality of sustainability reporting:
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This merger is an important step towards businesses and investors communicating together with more clarity about the issues that matter most to financial performance.
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It is hoped that clearer guidelines will focus reporting as a means to changing behaviours by promoting stronger corporate governance and decisive investment decision making.
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It will encourage a broader concept of value to be adopted within the markets rather than solely financial return. This, in turn, will ensure sustainability disclosure receives the same level of rigor as financial accounting.
In summary, shareholders and other stakeholders need trustworthy information upon which to evaluate business performance against this broader concept of how businesses create value, and they can only reward value creation if they can meaningfully identify it. This is why the development of a globally recognised reporting system is so crucial.
Key to the success of the introduction of a single reporting framework is companies understanding what their material issues are too; this will allow them to understand what elements of the system are most applicable and report the information that will be most decision useful for their stakeholders. This makes the evaluation of a materiality assessment more important than ever for companies looking to improve their disclosures in advance of potentially stricter regulations coming into force.
The ultimate goal is to make companies accountable for their role in helping to tackle urgent global environmental and social issues. By getting better information flowing, we can recouple economic and social progress, restore trust in market economies and build a better tomorrow.
Helping you unravel the acronyms
Unsure of where to start, or need support raising the standards of your sustainability reporting suite? At Design Portfolio, we have the in-house expertise to help you navigate the complexities of sustainability reporting and understand the opportunities of better ESG communications.
To find out how to integrate decision‑useful climate disclosures into your reporting framework, and prepare for the future regulations on climate reporting, get in touch at: