Financial reports must respond to investor demand for granular data on ESG risks.
Standard financial reporting practices can help to alert investors to sustainability risks, but there is still be a need for companies to produce separate sustainability reports, said Hans Hoogervorst, Chair, International Accounting Standards Board (IASB), yesterday.
Speaking at the IFRS Foundation Virtual Conference, Hoogervorst said information on firms’ exposures to climate risk could “remain buried” in financial statements if existing IFRS standards were relied on alone. “Separate disclosures on the effects of climate change might be required based on our materiality requirements,” he said.
Hoogervorst insisted that the principles-based approach of IFRS Standards meant that issues relating to climate change could be captured by existing reporting requirements – in terms of recognition, measurement and disclosure.
“The more urgent sustainability issues become and the more stringent public policy towards a zero-emission future becomes, the more financial statements will be affected by these developments,” he said, acknowledging that the large impairments to exploration-related assets revealed in recent financial statements from major oil companies has been “an eye-opener”.
But the “broad” scope of the potential impact of sustainability issues on firm’s business models were a good argument for additional, separate sustainability reports to flag the biggest risks, said Hoogervorst. “Many sustainability issues are very uncertain and have a very long-time horizon. This poses tremendous recognition and measurement challenges which often make it impossible to capture them in the financial statements,” Hoogervorst explained.
Sustainability reporting could also serve to make a company aware of the financial consequences of material risks much earlier. “For example, the scenario analyses suggested by the Taskforce on Climate-related Financial Disclosures, among other initiatives, have heightened the awareness of oil companies to the long-term financial risks of energy transition,” he said.
Upcoming revisions by the IFRS to the practice statement for management commentaries are intended to provide companies with more guidance on identifying material sustainability risks to investors, said Hoogervorst. Further, the trustees of the IFRS Foundation have set up a working group on sustainability reporting and are due to consult on their findings shortly.
Earlier this month, the IFRS Foundation announced plans to coordinate the creation of a new sustainability standards board, in collaboration with five organisations involved in setting standards for sustainable reporting. The five other bodies include the CDP, the Climate Disclosure Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council and the Sustainability Accounting Standards Board.
“The strength of our standards is their principle-based nature which allows new economic phenomena to be addressed as it comes along. Clearly, sustainability is increasingly becoming an economic issue,” said Hoogervorst. “My hope is that in the future financial reporting and sustainability reporting will come even closer together.”