The International Federation of Accountants released a call to action this month urging CFOs and other finance leaders to improve the quality of sustainability information and processes by championing an “integrated mindset.”
IFAC has been involved in bringing together the various standard-setters in the environmental, social and governance reporting space as ESG funds grow in popularity among investors, and financial regulators around the world have been encouraging greater alignment between the various standard-setters. By the end of this month, the International Sustainability Standards Board will be bringing together the Value Reporting Foundation, the group that oversees the Sustainability Accounting Standards Board and the International Integrated Reporting Council, with the Climate Disclosure Standards Board, under the auspices of the International Financial Reporting Standards Foundation (see story).
IFAC argues that an integrated mindset will improve the quality of sustainability information and processes and connect them to financial reporting and the value of the business. That in turn will lead to better decision making and communication with stakeholders, and eventually to reduced risk and cost of capital, but improved growth opportunities. CFO and finance professionals can bring an integrated mindset, thanks to their expertise in connecting and prioritizing information — both financial and sustainability-related — into a more integrated corporate reporting process that gives an accurate picture of performance and value creation to the organization, its investors and other stakeholders.
“We’ve been calling for overall enhancement in corporate reporting, the intangible financial and nonfinancial information, for quite a while,” IFAC CEO Kevin Dancey told Accounting Today. “That really starts inside the organization at the preparer level. You need the right systems to get the right data and internal controls, just to make sure that the information and data that is being used to support decision-making by senior management, and oversight by boards of directors, is as correct as can be. Historically, if you look at organizations, CFOs, their finance teams, and professional accountants generally, that’s their sweet spot — systems, internal controls and making sure the data is appropriate for financial reporting. And it’s going to be just as important for sustainability and nonfinancial reporting, even though it’s going to be more difficult, because by definition, the types of information we’re talking about, there’s more uncertainty, and the information is going to be more contestable. There are going to be lots of assumptions made around it. It’s going to be much more forward looking. For this to really work inside organizations, the reporting on the financial information and non-financial sustainability information needs to come together.”
An integrated approach can tie together the financial and sustainability information for companies.
“The whole reporting and disclosure agenda is in danger of not working unless that integration of information — sustainability, financial information and processes — happens within companies,” said IFAC director of advocacy Stathis Gould. “In many countries and regions around the world, the CFO and finance team has not been fully engaged. That integration is so important in terms of the risk agenda as well because sustainability and financial risks are converging. Unless you can address these sustainability issues in an integrated way, you’re not really going to be able to make decisions that enable you to deliver sustainable practices, products and services. Just taking some tangible examples, if your sustainability impacts or dependencies are related to things like water or fossil fuels, or your dependency on biodiversity, these risks either over time — or very quickly overnight — have huge financial implications. Connectivity, and confidence in the sustainability information about those impacts, and what really matters to your business, what’s relevant to your operating model, as well as being able to understand the financial consequences, are just so critical for the reporting and disclosure agenda.”
There’s often a considerable delay between release of the financial and sustainability reports, and IFAC would like to see those reports more closely integrated.
“When you look at it today, in many organizations, you have the financial reporting and the audited financial statements going in one report, and you’ll have a separate sustainability report go out, often months later,” said Dancey. “For example, in North America, there’s quite a time gap between when the financial statement audit is released and the sustainability reports are released. Interestingly enough, that gap is much less in Europe. If this information can come together and be reported in an integrated way, and be supported by an integrated team within the organization, I think that gives this whole process the best chance of getting the right information for senior management to make decisions and boards to provide oversight, as well as the best basis to get the reporting out so stakeholders and investors and others can get the information they need.”
An integrated approach will give auditors an opportunity to provide better assurance services to double-check the reliability of the sustainability information reported by the company.
“Many stakeholders are looking for this information to be assurable down the road,” said Dancey. “It really all starts inside the organization, and if that is not done the right way, it’s going to be disconnected and fragmented, and it’s really not going to meet the needs of stakeholders.”
The Securities and Exchange Commission in the U.S. and the European Commission in the European Union are preparing their own rules for climate-related disclosures by companies, which is one reason a global approach will be necessary, especially for multinational companies.
“You have a number of folks weighing in terms of what the right standard should be reporting right now,” said Dancey. “You have the SEC and in Europe, they have their directorate consultation, and of course, you have the ISSB. There are prototypes out there in terms of its climate standard and general disclosure standard. So you have lots of folks looking at what the reporting should be. Our view on it is that, at least as it relates to enterprise value information, which is key to assessing a company’s performance, that the standards related to that come from the ISSB. We say that because the capital markets and investors are global, and have a whole bunch of jurisdictional reporting. If that’s different around the world, it’s going to lead to a lot of regulatory fragmentation and increased costs.”
Interest in sustainability reporting is also increasing in Asia. “I think it’s already happened to a larger extent in Europe, but in the U.S. and Asia, you’re getting the financial controllers and chief accountants now being involved in these conversations in their business to ensure that there’s a good understanding of what’s material from an investor and capital market perspective, and there are the relevant controlled disclosure controls and processes around that information before it goes out into the market,” said Gould. “You’re seeing a very quick uptick now in the involvement of finance and accounting professionals in this space.”