“Accountants will save the world,” said Peter Bakker, President and CEO of the World Business Council for Sustainable Development (WBCSD), almost ten years ago. He was speaking at a UN Conference on Sustainable Development lamenting that companies are required only to report how much money they have made, but not how they have made it.
The world developed standards for accounting for financial capital and the value of manufactured capital, but not for the other forms of capital that are also required, and which are even more fundamental than financial, namely social, human and natural capital. This partial and unbalanced approach to accounting must change; and companies through their accountants need to find ways in which they produce useful, faithful, and reliable information on all forms of capital. Investors are not only interested in financial results but also asking about impacts – positive and negative – of organisations.
100 years of accounting
The Stock Market crash in 1929 brought on the Great Depression, and other crises and reforms over time resulted in two main financial accounting standards: the Financial Accountancy Standards Board (FASB) which issues the Generally Accepted Accounting Principles (GAAP) and the International Accounting Standards Board (IASB) which issues the International Financial Reporting Standards (IFRS). The GAAP are mostly used in the USA while the IFRS are used by about 140 countries, including the Caribbean. Both standard boards are governed by their own Foundations.
In recent decades, the number of climate and other ‘non-financial’ disclosure frameworks have been developed – most notable amongst these: the Global Reporting Initiative (GRI) in 2000, the Carbon Disclosure Standards Board (CDSB) in 2007, the Integrated Reporting Council (IIRC) in 2010, the Sustainability Accounting Board (SASB) in 2011, the Task-Force on Climate Related Disclosures (TCFD) in 2015, and the European Commission’s suite of legislation and directives over the years, which culminated in the ‘Fit for 55’ measures that are part of the Green New Deal announced in 2019. Many investors and reporting companies have been overwhelmed by the different reporting requirements, the lack of consistency and poor comparability.
What happened at COP26
Last week in Glasgow, accountants took a giant step forward. The IFRS Foundation announced three important measures aimed at improved governance and investment decision making:
(i) It has established a new International Sustainability Standards Board (ISSB) that will issue IFRS sustainability disclosure standards, that will sit alongside the International Accounting Standards Board (IASB) which issues IFRS financial accounting standards;
(ii) The IIRC and SASB, which merged earlier this year to form the Value Reporting Foundation (VRF), and the CDSB will consolidate and form part of the ISSB;
(iii) A Technical Readiness Working Group (TRWG) has prepared and published two prototype disclosure requirements – one General and one for Climate-related disclosures
Why accounting matters
Accountants have accomplished an important goal: agreeing to work together and establish the first global disclosure standard that goes beyond financial to include sustainability information.
The ISSB is expected to be operational by June 2022. Its mandate is to develop—in the public interest—a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs. There will be consultations on the proposed standards before they are issued, and countries will be encouraged to adopt these standards and make them mandatory, just like the financial accounting standards.
The sustainability standards will apply to public and private entities. Initially, there will be greater disclosure requirements related to the climate impact of companies. However, the Chair of the of the IFRS Foundation, Erkki Liikanen, expressed the overall intention and direction when he said, “Climate first, but not only climate.”
The result will be uniform and consistent global Sustainability Disclosure Standards that are designed to sit alongside the Financial Accounting Standards. The IFRS Foundation emphasises that as a result, investors and other providers of capital will have more comprehensive information available “to assess the risks and opportunities that arise from environmental, social, and governance (ESG) issues, which affect enterprise value.”
Are we going far enough?
As big as this step by accountants towards saving the world is, the James Bond like ‘bomb’ that Prime Minister Johnson spoke of at COP26 or the ‘disaster’ for humanity that UN General Secretary António Guterres spoke of, are far from being diffused or averted. For some, such as the US Security and Exchange (SEC) Commissioner Hester Pierce, it is feared that “it would be very easy for lax standards on the ISSB side to float over the IASB.”
However, the real danger is that success in keeping the two systems of accounting separate can lower the pressure to transform fundamentals. It is dangerous and inconsistent with international agreements about the nature of sustainability, to believe that ESG dimensions in themselves, separate from financial accounting decisions, encompass ‘sustainability’.
The IFRS Trustees decision is in the right direction, but will need to go even further to save the world: there is no doubt that the economy is embedded in the natural world, and not the other way around. This means that we need accounting that rigorously integrates all forms of capital and value, and that explicitly recognises that natural, human and social capital are more fundamental than financial and manufactured capital.
Dr Axel Kravatzky is managing partner of Syntegra-ESG LLC, vice-chair of ISO/TC309 Governance of organisations, and the co-convenor and editor of ISO 37000 Governance of organizations – Guidance. Disclaimer: the views presented are those of the author and do not necessarily represent those of any of the organisations he is associated with.
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