By Kevin Dancey, Chief Executive Officer, International Federation of Accountants (IFAC)
The work of the green transition begins not at the public-policy level but at the micro level, inside companies. This is where the rubber meets the road—where sustainability happens or doesn’t happen. At the same time, public-sector actors have a pivotal role in setting the regulatory frameworks and specific requirements that will support and direct companies on the road to sustainability.
It is worth looking more closely at some of the challenges facing actors at the micro level as they bring their organizations into a greener future—and at the essential complementary work going on at the macro level, particularly the creation of a healthy ecosystem for sustainability-related corporate disclosures.
Micro sustainability
As sustainability-related information takes its rightful place alongside traditional financial reporting, it has become more apparent than ever that sustainable value creation (SVC) is the right approach for businesses and society. Integrating sustainability (environmental, social and governance, or ESG) risks and opportunities into how companies think—in the boardroom; among senior management; and in how strategies, business models and decisions are made—is the clear path to corporate success.
This is important background information, but where do we go from here?
The answer is that sustainable value creation follows the adoption of an integrated mindset. Everything a company does and how it “thinks” must fully incorporate ESG risks and opportunities. Anything less will jeopardize long-term—and short-term—value creation.
Information silos within companies—for example, between chief financial officers and corporate sustainability officers—are barriers to decision-making. Breaking down these information silos is key to enhancing communications between companies and their investors and other stakeholders. Company disclosures must connect high-quality sustainability information to financial information so that financial capital supports long-term, sustainable value.
Boards and chief executive officers are turning to the accounting and finance functions to champion an integrated mindset. This comprises many key actions. The finance function should lead on connecting information and reporting processes (e.g., governance, risks and ESG) into a more integrated corporate-reporting process. It should consolidate and prioritize information and needs across the organization and among external stakeholders. It should objectively analyze and reconcile trade-offs between stakeholder interests within and outside the company.
This is easier said than done. And in many organizations, there simply is not enough capacity for or expertise in the sustainability-related work at the heart of these connections and collaborations across corporate functions. Sustainability cannot start within companies unless professional accountants and other finance professionals are equipped to lead the transition; an integrated mindset cannot take hold within companies unless the finance function is fluent in sustainability-related skills and competencies.
At COP27 (27th Conference of the Parties to the United Nations Framework Convention on Climate Change) last November, the IFRS (International Financial Reporting Standards) Foundation announced a strategic Partnership Framework for Capacity Building. IFAC (International Federation of Accountants) was one of the founding members, representing the accountancy profession and the efforts we must make to prepare for high-quality sustainability disclosure and its assurance. The Partnership Framework also signaled to the world that the work of the International Sustainability Standards Board (ISSB), and sustainability disclosure more generally, is globally relevant—so the Global South is as important to the green transition as developed countries.
Given this commitment by the ISSB to work with emerging economies, IFAC is currently developing a new State of Play benchmarking study that will focus on 20 new jurisdictions that complement the 22 jurisdictions we currently examine. The primary focus is on a new set of jurisdictions outside the G20 (Group of 20), with six in the Middle East and Africa, four in Asia-Pacific (APAC), seven in Europe and three in Latin America. This new benchmarking will foster even more global, evidence-based policy discussions and enhance our understanding of where we are today regarding both reporting and assurance.
For companies globally, the message is clear: It’s no longer a question. Sustainability disclosure will be part of the future of corporate reporting. So, it is essential that companies and individuals move swiftly to acquire the right sustainability-related skills and competencies.
Global alignment
No matter where we live or what our political orientation may be, everyone needs high-quality ESG information to make well-informed decisions. That goes for consumers, capital markets, governments, non-profits and businesses—both large and small. It is about doing the “smart” thing and the “good” thing—all focused on supporting sustainable value creation. This falls squarely within the public-interest mandate of all governments and policymakers.
A wide range of stakeholders, including the global accountancy profession, are lending their voices to the campaign for convergence on an investor-focused, global baseline of sustainability-reporting requirements that could be used around the world—much as IFRS financial-reporting standards are used in some 140 jurisdictions. The ISSB, established in November 2021, is a growing reality with operations worldwide. And in June, at the end of a year-long consultation period, the ISSB released its first two standards for sustainability disclosures: S1, addressing general sustainability disclosures, and S2, addressing climate-impact disclosures.
The ISSB’s progress has been remarkably swift. Much work is needed to support high-quality implementations of the standards worldwide. And a new agenda consultation is open for comment to help identify new focus areas for the board, such as biodiversity, human capital and rights, and connectivity.
Of course, the ISSB is not the only standard-setter at work. The European Union’s (EU’s) standard-setting initiative has delivered an extensive set of requirements that will be finalized in the coming weeks; the United States is still examining disclosures on climate; and other regulators are also considering what actions to take. As the need for high-quality sustainability disclosure standards drives a growing number of well-intentioned initiatives around the world, jurisdictions should dedicate themselves to pursuing alignment. It would be an enormous missed opportunity if companies—which raise capital globally—were forced to keep essentially multiple sets of books: one to satisfy their local reporting requirements and another to provide information to investors globally.
This missed opportunity would directly affect value creation at the micro level. For companies with operations in multiple countries with different reporting frameworks, the complexities and administrative burdens of reconciling misaligned concepts, terminologies and metrics would be obstacles to adopting an integrated mindset and connecting financial and non-financial information. Even small companies working with one set of standards might do business with foreign partners subject to another set of standards—and lose valuable time and resources bridging the gap.
Public-sector leaders must strive to avert the fragmentation of standards. Moreover, voluntary reporting has taken us far, but all jurisdictions need mandatory reporting to achieve consistent, comparable, decision-useful, investor-grade information.
A closely related and very important topic is the emerging market for the assurance of sustainability disclosures. Mandatory and voluntary reporting is increasing around the world; following closely behind is the need for independent, high-quality assurance engagements.
Financial-audit engagements are the purview of accounting and finance professionals working inside companies; their existing expertise will be critical to bringing the same trust and confidence that markets have in financial information to sustainability information. Without robust assurance, corporate disclosure of ESG information will never be as decision-useful as audits of financial information. This concern, among others, brings us to the larger context within which companies are pursuing sustainable value creation.
The need for mandatory assurance and alignment on a single global baseline is clear in the latest IFAC and AICPA-CIMA (American Institute of Certified Public Accountants-Chartered Institute of Management Accountants) “The State of Play” report1. As with sustainability disclosure standards, fragmentation threatens to create unnecessary cost, complexity and confusion and will not serve the public interest. It is imperative that the International Auditing and Assurance Standards Board (IAASB) complete its work on a new standard for conducting sustainability assurance. The goal is an overarching, global baseline standard for broad-based sustainability-assurance engagements that applies to all types of sustainability disclosures and topics and can be used by professional accountants and other skilled service providers.
Building an ecosystem
Individually, the ability to adapt swiftly and effectively to the demands of sustainable development will be decisive in the success or failure of every enterprise. Collectively, their joint ability to navigate this transition will determine whether society overcomes the crisis of unsustainable development.
The capabilities of individual companies will be helped or hindered by the approaches taken at the macro level. We can set businesses up for success by converging on a single, harmonized global baseline of sustainability disclosure standards, complemented at the local level as appropriate, and by driving toward the same level of alignment on standards for the assurance of these disclosures. And developing this ecosystem of sustainability reporting and assurance will be impractical—perhaps impossible—unless these systems are made mandatory at the national level.
Companies have no time to waste before they begin their journeys. In parallel, governments and regulators must develop healthy ecosystems of sustainability disclosures and assurance of those disclosures. Companies cannot thrive in the green transition without it.
The road ahead to sustainability is a long one. There will be twists and turns. But our only choice is to move forward with speed and clarity, pursuing a more sustainable world.
Reference
1 International Federation of Accountants (IFAC): “The State of Play: Sustainability Disclosure & Assurance 2019-2021 Trends & Analysis,” February 27, 2023.