The end of the year is fast approaching and amid the never ending consequences of COVID-19, a major issue which will affect the current as well as future generations is, undoubtedly, climate change.
During the first two weeks of November an important world event was held in Glasgow, namely, COP26. The main item on the agenda was to convince governments to increase their individual efforts so as to keep global warming in check. The overall aim is to limit that global warming by not exceeding a further 1.5 degrees centigrade by the end of the century.
Notwithstanding the absence of Russia, China, Brazil and Turkey at the summit, the 200 or so nations participating committed themselves to (i) increasing their individual commitment to decarbonisation by the end of 2022; (ii) ‘phase-down’ persistent coal power; (iii) scrap inefficient fossil-fuel subsidies and (iv) assisting further developing nations by doubling up the current adaptation funding.
Beyond the political commitment of getting there, it all boils down to financial commitments. Those financial commitments necessitate that members of the accountancy profession come into play in being the gatekeepers of all the data that will have to be collated, reported and audited upon. That data will eventually be presented as part of a set of financial statements in the case of large and medium-sized entities and part of the annual report in the case of listed entities. The information to be presented falls within the ambit of the current buzz-word, sustainability or ESG (Environment, Social and Governance) reporting.
Whatever those reporting requirements might be, they surely have to emanate from a prescribed set of standards which, hopefully, would be internationally recognised. Doing so would not only ensure efficiency in the production of the disclosures but more importantly, increase comparability. From an academic point of view achieving internationally comparability should be a desirable qualitative characteristic of all data generated and reported.
At the COP 26 event, the International Accounting Standards Board (IASB) launched its sister body, the International Sustainability Standards Board. The intention is to come up with a set of international standards that will assist preparers of financial statements in fulfilling their obligations towards sustainability reporting. More important, though, is that preparers can put their minds at rest that such standards are in total conformity with the extant set of international accounting standards (IASs). Concurrently, the EU has delegated the European Financial Reporting Advisory Group (EFRAG) to come up with a set of sustainability standards to be adopted within the bloc.
In my opinion the EU should reconsider such a position and just as it took the bold step in 2002 to move swiftly to adopt IASs post the ENRON debacle, this time round it should once again support the IASB in its endeavour to produce the much needed sustainability standards, through the ISSB.
In measuring sustainability there already exists a number of other reporting initiatives. The Global Reporting Initiative (GRI) focuses on metrics that show the impact society and the planet suffer from individual firms. In contrast, the Sustainability Accounting Standards Board (SASB), focuses more on the causal effects of ESG on companies’ performance. The Task Force on Climate-Related Financial Disclosures (TCFD) and the Carbon Disclosure Project (CDP) are in the main concerned with climate change – looking explicitly at firms’ exposure to its physical effects and to potential regulations to control carbon emissions.
It is safe to say that all the above can only create further confusion for preparers as they go on upgrading their internal systems so as to capture the necessary data. As correctly identified by The Economist in its issue of the October 3rd 2020 discussing the subject matter of measuring sustainability that it is ‘time to pare the long, confusing list of ESG accounting standards’. Hopefully, such a recommendation does not land itself on deaf ears!
Dr.Ivan Grixti is a senior lecturer in Financial Accounting at the University of Malta