Harmonization of sustainability reporting standards – a solution to which problem?

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Text by: Jenni Puroila and Svetlana Gross, PhD students at Misum

Currently there are more almost 400 different sustainability reporting instruments globally[1]. The SDGs (Sustainable Development Goals) include a specific goal (Goal 12.6) to encourage companies to report on sustainability as part of their reporting practices. Governments, NGOs, market regulators, stock exchanges, industry associations and standard setters have developed requirements for reporting. The question is no longer about whether companies should report on sustainability but rather how. Today the discussion is focused on standardization and harmonization of the reporting, but less so about its purpose and long-term effects.

Earlier in November Misum had the pleasure of hosting a public lecture by its board member Prof. Bob Eccles, who is currently Visiting professor of Management practice at Saïd Business School at Oxford University. The lecture’s topic was “Setting standards for non-financial information: what is the solution?”, and Prof. Eccles raised some important and interesting points on the topic. The question he brought into the discussion was “who should take the responsibility of developing the global standard for non-financial reporting”.

This request for a solution is relevant since the proliferation of standards has been criticised to have increased the reporting burden for companies but also creating a certain amount of confusion among reporting entities and among information users. Therefore, the current call for harmonization and alignment seems to be echoing all over. However, the large number of standards reflects the breadth of sustainability-related issues as well as the innovation and experimentation process in this emerging field. The question that is commonly being ignored or taken for granted is to whom the reporting is directed to.

It is an important question to ask, because it determines what purpose this reporting is serving and what kind of decisions it is supposed to influence: operational, strategic or purely financial? The standards for sustainability related information such as SASB and IIRC are developed to provide information for financial decision-making. As are the more traditional financial reporting bodies such as FASB (US) or IASB (the rest of the world). Throughout Prof. Eccles’ lecture the assumption that the investors are the main audience of sustainability reporting was not questioned. What it means in practice is that information about the non-financial aspects of the company’s environmental and social impacts need to be translated, and integrated, into financial terms.

Including financial implications of social and environmental risks as a part of financial reporting provides more accurate financial information and is in fact fulfilling those reporting requirements that are already in place in financial reporting regulations. This is nothing new. But it does not fulfil the purpose of sustainability reporting if we assume that its purpose is to support the transition towards more sustainable economy.

Today, the investors are expected to make the “right” decisions about our common future, but based on which grounds? One of the most recent and acclaimed efforts in integrating environmental, or specifically climate-related, information into the current accounting and investor decision-making is The Task Force on Climate-related Financial Disclosures, TCFD[2]. It has recently published a framework and recommendations for reporting to be used by financial and non-financial organizations representing the largest greenhouse gas emitting industries: energy, transportation, materials and buildings, agriculture, food and forestry. The focus is on financial impact of climate-related risks and opportunities on an organization, rather than the impact of an organization on the environment.

Recommendations include describing “the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario”. If focusing on the organizations’ impact on the environment, an honest analysis from fossil-based extraction and energy companies will be – “there is no scenario consistent with a 2°C warming where our company survives”. The accepted moderate emissions reduction pathway consistent with (a 75% chance of keeping the global warming below) 2°C includes that fossil-fuel emissions should peak by 2020 at the latest and fall to around zero by 2050[3]. Scenarios for lower than 2°C require even faster phasing out of fossil fuels. Will the companies adhere to this analysis when focusing solely on the financial impact on an organization as requested by these recommendations?

There is nothing wrong with the approach of those standards highlighting investors’ point of view as such, but problems arise when this approach becomes the dominating one. Giving the lead responsibility of alignment and harmonization to those organizations that focus on the investors’ perspective means maintaining the status-quo. This kind of reporting does not give enough incentive for companies to transform their practices towards more sustainable economy but rather contributes to their financial stability. Should this kind of reporting even be categorized under the 400 sustainability reporting instruments when in fact its purpose is to provide financial information about non-financial matters without requirements of measuring the impacts outwards to society and environment?

The sustainability challenges are larger and encompass issues that have implications reaching beyond the financial performance. If we want to find a solution for these major sustainability challenges we need a broader and more inclusive perspective that changes the target from sustaining the financial returns to sustaining our planet and humanity.

Text by: Jenni Puroila and Svetlana Gross, PhD students at Misum

Follow Jennie Puroila on Twitter: @jennipuroila

Follow Svetlana Gross on Twitter: @tant_storm

[1] UNEP, GRI, KPMG & the Centre for Corporate Governance in Africa (2016) Carrots and Sticks Global trends in sustainability reporting regulation and policy. Available at: https://assets.kpmg.com/content/dam/kpmg/pdf/2016/05/carrots-and-sticks-may-2016.pdf

[2] https://www.fsb-tcfd.org/publications/final-recommendations-report/, June 2017

[3] Rockström, J., Gaffney, O., Rogelj, J. et. al. 2017. A roadmap for rapid decarbonization. Science, Volume 355 Issue 6331

 

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