IFRS Foundation Trustees: key acknowledgements not addressed in strategy

by Carol A Adams

Main points:

  • the IFRS Foundation Trustees’ response to feedback acknowledges some key findings of research;
  • some matters acknowledged by the Trustees are not (currently) incorporated into their strategy.

Research demonstrates the urgent need for mandatory sustainability reporting standards to achieve sustainable development and also that such standards need to be enforced and reporting externally assured. The debate has been around how to get to there.

The IFRS Foundation Trustees put out a Consultation Paper on Sustainability Reporting last year claiming that a new standards board under its umbrella should be the standard setter and that the focus should be on the “investor perspective”. Evidence based analysis was not provided, but see the independent analysis of reports leading up to its release here (Table 1).

Key acknowledgements

The brief summary of the feedback in the 577 responses to the Consultation Paper addresses some of the key issues that are supported by academic research and the experience of practitioners. In response to the feedback, the Trustees:

  • acknowledge increasing concern about the impacts of organisations on sustainable development (citing biodiversity, water scarcity and pollution as examples);
  • acknowledge that stakeholder concerns regarding the social and environmental impacts of companies influence value creation (or erosion) for investors;
  • recognise the need to consider opportunities arising from sustainable development issues as well as risks;
  • recognise that investors are interested in corporate actions to address climate change (and other sustainable development issues);
  • acknowledge the need for a conceptual framework to underpin standard setting;
  • recognise the need for a broad sustainability scope (whilst tackling climate disclosures first);
  • recognise the importance of narratives as well as metrics;
  • acknowledge the need to work with urgency;
  • acknowledge the need to broaden its stakeholder base.

The Trustees also state that:

… some respondents suggested the Trustees consider anchoring the development of IFRS sustainability standards to the UN’s SDGs, while still ensuring a focus on the information needs of investors. (p 18)

In fact some responses argued that anchoring to the UN SDGs requires a focus on both the impact of the organisation on sustainable development and value creation (or depletion) for the organisation and society.

Whilst a positive development, some of the key issues acknowledged by the Trustees are not addressed by their strategy.

The strategy gaps

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In their response to the feedback, the Trustees made frequent references to addressing enterprise value and the information needs of investors. They intend to work with the Value Reporting Foundation (the merged IIRC and SASB) and engage with CDP and GRI on the periphery.

… the Trustees expect the new board to build upon the well-established work of the TCFD and the work of leading standard-setters in sustainability and integrated reporting focused on enterprise value (p 17) [emphasis added]

But as they acknowledge, stakeholder concerns about the social and environmental impacts of companies influence value creation for investors. Addressing the sustainable development impacts of companies is also in the public interest. The Trustees argue that their strategy is in the public interest.

The Trustees recognise the importance for the public interest of reporting standards that address enterprise value—which capture expected value creation (or erosion) for investors in the short, medium and long term
and is interdependent with value creation for stakeholders in the context of social and environmental imperatives (p11)

Investors are interested in the impact of an organisation on sustainable development (hence their inclusion in all GRI’s governance bodies).

The Trustees commit to exploring the creation of a multi-stakeholder expert consultative committee to help the new board identify relevant sustainability topics. It is hard to imagine a private sector body doing this with credibility. The GRI has a credible and long established multi-stakeholder approach.

The Trustees seek to redefine “sustainability reporting” to be reporting on “ESG matters”.

Overall, the IFRS Foundation’s strategy appears to be designed to appeal to the US, where powerful forces seek to adhere to financial materiality. There appears to be an unstated ambition for the new Value Reporting Foundation to be subsumed within the IFRS Foundation. (The ‘technical readiness working group’ does not include CDP or GRI). The European Commission/EFRAG approach is fundamentally different to that proposed by the Trustees on all key aspects. (There is an interesting parallel with the development of financial reporting standards where the IASB made significant compromises in an attempt to gain acceptance in the Financial Accounting Standards Board in the US.)

Bridging the gap

If we are to achieve the SDGs, reporting needs to cover:

  • material impacts of an organisation on sustainable development (performance and targets);
  • sustainable development risks and opportunities;
  • how sustainable development matters are incorporated into strategy and the business model;
  • other aspects of management approach and governance oversight.

The Trustees’ strategy does not address all these matters. These ingredients of reporting to achieve the SDGs are reflected in the Sustainable Development Goals Disclosure (SDGD) Recommendations that develops a conceptual framework and reporting requirements drawing on the most used frameworks/Standards TCFD recommendations, Integrated Reporting Framework and GRI Standards (explained in the Feedback document on the consultation on the SDGD Recommendations).

The Trustees will set the strategic direction of the new board, but were not appointed for their expertise in sustainability reporting. It is increasingly accepted that corporate boards should include sustainable development in their skills matrix. The gap between what the Trustees acknowledge and their strategy needs to be addressed. It will not be addressed through the guidance of a ‘technical readiness working group’ that includes only those organisations with a focus on enterprise value.

The GRI and EFRAG will play a critical role in achieving harmonisation between these fundamentally opposed approaches. I believe the wider audience and focus on sustainable development will ultimately prevail because it has integrity, is informed by evidence and because national governments have committed to sustainable development. Research shows that the mega transformation to sustainable development does not occur where an organisation privileges a profit and financial materiality focus over a broader view of value for the organisation and society. 

The letter signed by Professors of Accounting researching sustainability reporting and Editors of all key journals publishing research in the field was unprecedented. There was no dissent about the summary findings of research.

Additional comments on this post are on LinkedIn

Note: This article draws on the feedback document only. It does not address the exposure draft to change the Constitution of the IFRS Foundation to accommodate an ‘International Sustainability Standards Board’.

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Comments

  1. Fully agree with the comments.
    The current and planned IFRS activities will not result in a global and enforceable set of sustainability standards. We will still see an essential difference between the reporting in the US and Europe and other parts of the world.
    Personally I doubt MSCI, Sustainalytics, banks, pension funds and others would shut down their assessment departments and use this new set of standards as a replacement.
    We should be working with the differences and not wasting valuable time and resources on a new set of standards or a Board.
    Let us build a data set on getting the 45,000 listed companies and 27+million private companies worldwide to report on their Greenhouse Gas emissions as a first step. Connect that information with their tax reporting to their National Governments and use that in the National NDCs.

    • Actually Glenn, you would be surprised, not all sustainability research services think and act in lockstep on accordance with the US way of doing things. Having been applying sustainability research concepts for the past 7 years for our asset owner clients, and more recently SDG integration, rather than just the older ESG frameworks focused on UN norms exclusions, we do very much see the value of the approach Carol endorses. We completely concur with her analysis of the US Vs UK/EU approach to decision usefulness; the parallels (fault lines?) with IFRS are exactly as she describes. Just because the market is dominated by big box US firms does not mean that all governance and sustainability research is one size fits all. With ovy 25 years experience of researching governance from an Anglo-European perspective, we can say that there is demand for value and values-driven stewardship principles rather than just box ticking rules.

    • Interestingly, greenhouse gas emissions are about the impact OF an organisation. Seems a waste of time working out how this data is related to “enterprise value”. We know it’s bad for the environment and society.

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