Standards bodies call for increased cohesion between sustainability and financial reporting.
Financial reporting by companies needs to better support and complement sustainability reporting to help investors understand existing and future climate risks, independent sustainability standards organisations Global Reporting Initiative (GRI) and Climate Disclosure Standards Board (CDSB) have said.
The GRI and CDSB outlined their recommendations separately in response to a consultation paper released by the International Financial Reporting Standards (IFRS) body in September, ahead of its December 31 deadline.
“We believe that enhanced financial reporting must exist alongside sustainability reporting. We invite the IFRS Trustees to ensure that the interconnectivity between financial reporting and sustainability reporting is strengthened, allowing financial reporting to fully recognise the financial consequences of the risks and opportunities arising from the economic, environmental and social impacts of corporate activities,” the GRI said.
Both organisations reiterated their support of the IFRS proposals, such as the implementation of the Sustainability Standards Board (SSB), and have offered to collaborate in order to improve both the effectiveness of existing non-financial reporting standards and the implementation of potential future reporting frameworks.
Mandatory non-financial reporting
Reporting frameworks such as the non-financial reporting guidelines published by Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) have been welcomed by international reporting bodies. However, the GRI and CDSB noted that the IFRS can do more to encourage increased transparency within these disclosures, such as calling for non-financial reporting to be mandatory.
“Although disclosure of climate-related financial information by companies has increased per the most recent TCFD Status Report, continuing progress is needed, particularly quantifying the potential financial impacts of climate change on their businesses and strategies,” the CDSB said.
This follows recent discussions by regulatory leaders about the need for a global sustainability standard, which would allow for more clarity around climate-related disclosures for investors, stakeholders, policymakers and corporates.
“Improved depth and quality of reporting can only be realised when financial and sustainability reporting are on equal footing – with mandatory disclosure requirements for both,” added Eric Hespenheide, Chairman of the GRI.
Disclosing existing climate risks
While acknowledging the need to provide investors with future-focused disclosures on climate risks, CDSB underlined the importance of disclosures which provide investors with “the current financial effects of material climate-related issues on a company’s financial statements”.
Without an understanding of today’s climate-related risks, investors will be ill-placed to efficiently engage with, value or vote within their investee companies, CDSB noted. It may also impact their future capital allocation decisions.
“Disclosures of climate-related matters also enables markets to more effectively price the potential future financial impacts of climate change, which in turn supports the reallocation of capital resources necessary to transition to a low-carbon economy,” CDSB added.
Implementation of a new corporate reporting regime
As well as strengthening existing financial reporting frameworks to better recognise non-financial sustainable issues, the GRI argued that “a new corporate reporting regime is needed in which financial and sustainability reporting is given equal footing”.
By introducing a framework which places equal importance on financial and non-financial issues, the GRI noted this would encourage “the same level of public interest oversight for sustainability reporting standard-setting” as for financial reporting.
The GRI has claimed it would welcome closer collaboration with the IFRS Foundation to establish this future corporate reporting regime, which would ensure financial and sustainability reporting are mandated globally “as two key perspectives interconnected by their respective underlying standard-setting mechanisms and managed with the same rigor.”
“Under such a regime, financial reporting will leverage the information made available through sustainability reporting so as to fully reflect the financial implications”, GRI added.
From December 31, the IFRS will assess “whether and to what extent the Foundation might contribute to the development of [sustainability reporting] standards”.
The IFRS will also continue to collaborate with other reporting standards organisations to improve the transparency and quality of non-financial disclosures, as has been seen with the emergence of “the group of five” and the announcement of a merger between the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) to form the Value Reporting Foundation.