Heading in the wrong direction: IFRS and its band

by Carol A Adams

Main points:

  • Recent contributions to the sustainability reporting debate are still contradictory.
  • The key ‘players’ are heading in a direction that will not lead to transformation.
  • Some organisations/individuals are welcoming each new opposing contribution.
  • There is a need for more evidence based analysis.

The madness in the discourse on the ‘harmonisation’ of sustainability reporting continues with no apparent reference to the transformation that is needed nor a realistic vision for what the proposals on the table can achieve. That key facts and counterviews informed by evidence are being overlooked cannot last – the IFRS Foundation and the Impact Management Project are heading in the wrong direction. This article highlights the different directions taken in recent output from IOSCO, IMP, IFRS, EFRAG and the IIRC.

IOSCO wants to see disclosures on the dependence of companies on the environment and “investors’ information needs on wider sustainability impacts”. The IFRS Foundation and the Impact Management Project (IMP) have conceptually ignored this.

The EFRAG/EU approach is more obviously informed by evidence and detailed consultation. It is fundamentally different to that proposed by the IFRS Foundation on the back of an ill-informed consultation paper. IMP published A Statement of Intent favouring the approach of the majority of framework/standard setting organisations involved rather than the approach used by most reporters and relevant to more key stakeholders.

Many of the initiatives/reports that preceded the IFRS Consultation Paper and the IMP led Statement of Intent favour a double/dual/stakeholder materiality perspective (see table 1 in Adams and Abhayawansa 2001). Yet the IFRS Foundation favour enterprise value from an investor perspective. The IMP justify this through the ‘back to front’ notion of dynamic materiality. (Its back to front because if you don’t give priority to looking at the impacts of an organisation on sustainable development and sustainable development megatrends you can’t pick up what’s relevant to investors.)

Companies have broadened their thinking in recent years beyond profit to value creation for the organisation and society. Yet, the IFRS Foundation and the Impact Management Project are intent on narrowing the focus to enterprise value. The recent revision of the International <IR> Framework, in falling in line with this narrowing rather than heeding the trend in reporting and broadening out the definition of value, has become less relevant to those seeking to push boundaries. It has taken a wrong turn in reaching transformational potential.

The majority of companies using the International <IR> Framework do so with GRI Standards because they want to report their impact on stakeholders. Yet, the IIRC and SASB, both focussing on a narrow definition of enterprise value, are instead trying to encourage organisations to use the International <IR> Framework with SASB indicators. This is a backward step for sustainable development. The International <IR> Framework once had the potential to provide a conceptual framework that incorporated both impacts of an organisation on sustainable development and value creation for organisations, their providers of capital and for society.

Organisations such as ABN Amro, Durham University, Marks and Spencer, Sanford, SSE, Summa Equity, Unilever and Van Lanschot Kempen link their impact on contribution to the SDGs with transforming the capitals through their business model as suggested in the IIRC commissioned The Sustainable Development Goals, integrated thinking and the integrated report. Companies are increasingly seeking to report their impacts on contributing to the SDGs. National governments and other stakeholders have an interest in them doing so. Yet this isn’t advanced in recent publications by the Impact Management Project, the IFRS Foundation or the International Integrated Reporting Council. The revision of the International <IR> Framework fails to address this.

Alternative ways forward were suggested in responses to the IFRS Consultation Paper including this one with my colleagues at Durham University. There is no indication from the IFRS Foundation as to how any of the suggestions made by respondents have been considered. Meanwhile, it is frustrating to see organisations and individuals ‘welcoming’ each new contribution, however opposed to those they have previously ‘welcomed’, or even their own. And all without any agreement on what we are, or should be, trying to achieve – beyond making life easier for those investors who seek to appear to care about sustainable development.

There is a need for more evidence based analysis both on what we need to achieve and how to get there.
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Comments

  1. Julian Hare says:

    The neoliberal capture and suppression of
    IR is being stitched up. IR was always in conflict with neoliberal ideologies which have controlled big business, governments and all major institutions (including top academic) worldwide since Thatcher Reagan times.

  2. I am in full agreement if with Carol’s assessment and comments. There is a much simpler way forward.
    There are roughly 45,000 listed companies and more than 27 million private companies in the world, though Google indicates potentially more than 100 million private companies. There are roughly 10,000 sustainability reports annually following KPMG’s and GRI’s reports. The reporting referred by the blog is not mandatory in all jurisdictions and will impact only a small portion of the listed companies.
    It will take roughly a decade for the harmonization process to have any significant effect. Clearly the amount of resources and urgency we have should change IFRS’s and the related organizations’ behavior.
    Here is a simpler, faster and cheaper alternative.
    There are strong views that climate change is the most critical sustainability issue, and reporting of Greenhouse Gases (GHG) is already well defined by the WBCSD/WRI GHG Protocol. We do not need a further harmonization process to tell us this.
    Let all governments mandate GHG reporting in connection with companies’ tax reporting in all jurisdictions and let the software used for FINREP and COREP be amended to suit. Leave the rest up to national governments in connection with their Nationally Determined Contributions (NDCs) under the Paris Agreement.
    Once that has been successfully undertaken let the lessons learned inform the next phase for further environmental and social issues.
    That will be substantially quicker and more direct than any grand gestures referred in the blog.
    This was suggested to the IFRS last year in their request for comments.

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