Efforts to consolidate sustainability information disclosure: What you should know

2021 / 3 / 24 | Author: enw_editor

There was an important development in the field of sustainability information disclosure in September 2020. The five leading global framework- and standard-setting institutions for disclosure of sustainability information (e.g., non-financial information and environmental, social and governance [ESG] information) announced the statement of intent to collaborate on more comprehensive corporate reporting.

Statement of Intent to Work Together Towards Comprehensive Corporate Reporting

The participating five institutions are the following:
– Global Reporting Initiative (GRI), which provides standards for sustainability reporting
– International Integrated Reporting Council (IIRC), which has developed the integrated reporting framework
– Sustainability Accounting Standards Board (SASB), which provides industry-specific standards which identify the set of financially-material sustainability topics and their associated metrics
– Climate Disclosure Standards Board (CDSB), which advances climate change reporting framework
– CDP, which scores companies based on their information disclosure on climate change, forests and water security

In the last two decades, various frameworks of sustainability information disclosure have emerged and have been embedded in many companies’ disclosure. On the other hand, it is also true that the understanding of the objective, position, or contents of these diverse frameworks has not necessarily been sufficient, causing confusion or burden among companies.

It is important to understand the concept called “materiality” when working towards comprehensive reporting. In this statement it is defined that, as the understanding that companies’ performance on ESG and sustainability topics influences their financial performance has become widespread, materiality concepts are categorized largely into two categories: 1) materiality from the perspective of the organization’s significant impacts on the society, and 2) sustainability topics that are material for enterprise value creation. Furthermore, it emphasizes that what is considered material can change, sometimes slowly but sometimes rapidly – a concept referred to as “dynamic materiality.”

  • In the outer layer lies reporting on matters that reflect the organization’s significant positive or negative impacts on the economy, environment and people.
  • In the central layer lies reporting on the sub-set of sustainability topics that are material for enterprise value creation
  • In the inner layer lies reporting that is already reflected in the financial accounts
  • Sustainability topics that a company once considered immaterial for disclosure can become material either gradually or rapidly – as with human capital topics such as racial equity and, more recently, the Covid-19 pandemic.

Given the dynamic nature of materiality, there are two kinds of reporting required of companies.

  • Reporting on sustainability (Sustainability reporting) to a diverse group of stakeholders
  • Reporting on enterprise value creation (Integrated reporting) to stakeholders whose primary use of the information is to make economic decisions

Please refer to the figures on pages 5 and 14 in the statement to better understand the above explanation.

At the same time as this joint statement was announced by the five institutions, International Financial Reporting Standards (IFRS) Foundation, which provides the internationally recognized IFRS Standards, also announced in its consultation paper its proposal to establish a new board to develop global sustainability standards. This is a notable development as the organization lies at the center of the mainstream, setting global accounting standards and rules for corporate accounting today.

 

Furthermore, there are other efforts related to corporate sustainability information disclosure, accelerating these developments, including an initiative to quantify and monitor social impacts, and the launch of a project to develop an effective methodology to incorporate companies’ environmental and social impacts into their corporate valuation.

It may take a long time until this series of endeavors is finally integrated into legitimate international standards. However, there is no doubt that they will become rules that companies should follow in a few decades. Companies are expected to foresee these changes in the future, reflect on the purpose of reporting, and instead of just passively wait until the rules are set, actively take their own initiatives ahead of time.

(Takeshi Nozawa)