Reshaping the corporate reporting system
In a nutshell …
Since 2019 there has been a concerted move to achieve a global comprehensive corporate reporting system. A big part of this is ensuring consolidation among the many sustainability standards and frameworks that face preparers. With this in mind, in September 2020, the International Integrated Reporting Council (IIRC) and four of the main sustainability players joined hands and released a Statement of Intent to Work Together to achieve greater alignment – the four being the Climate Disclosure Standards Board (CDSB), Carbon Disclosure Project (CDP), GRI and Sustainability Accounting Standards Board (SASB).
In December 2020, the group (they’re known as the ‘gang of five’ by industry players) released the Reporting on Enterprise Value – the paper offers a prototype showing how their existing sustainability guidelines plus the TFCD recommendations can all fit together to achieve global standards for sustainability-related financial disclosures in the area of climate change. This paper is significant and is worth a read as it is offers an accepted prototype that could appear as the basis for future global sustainability reporting standards. The paper has another significance … it initiated the term ‘enterprise value’ (see below).
In November 2020, the IIRC announced that it will merge with the US-based SASB in June 2021 to form the Value Reporting Foundation (VRF) (in essence this can be seen as the first step on the road to global consolidation, however, it came as a surprise to many). Their motivation for the merger is that the International <IR> Framework offers the structure (the how) and the SASB sustainability indicators offer the metrics for measuring impacts and outcomes (the what). There are actually already commonalities between the two, but some areas still need clarity (for instance, matching the Content Elements to SASB’s 5 dimensions and creating indicators for the gaps (this guidance is being worked on). The IIRC website offers useful information on how the two currently match up – see https://integratedreporting.org/news/strengthening-an-integrated-report-using-sasb-standards/
For information on SASB see https://www.sasb.org/standards/ Per the IIRC website, “SASB organizes the universe of sustainability risks and opportunities into sustainability dimensions, also known as the ‘universe of sustainability issues.’ This provides a structure for SASB’s industry-specific Standards. The five sustainability dimensions are categorized as environment, social capital, human capital, leadership and governance, and business model and innovation. The dimensions are refined further into 26 general sustainability issues/ topics.” Each issue has its own indicators and there are 77 industry standards. As to how the SASB standards fit with the GRI standards, the two organisations issued a paper in April 2021 to show their complementarity https://www.globalreporting.org/about-gri/news-center/gri-and-sasb-reporting-complement-each-other/
Arise the accountants
In September 2020, the IFRS Foundation (the ruling governance body of the International Accounting Standards Board (IASB) which issues standards on financial accounting reporting used around the world except in the US which has its own standards) issued a consultation paper on whether or not it should also offer sustainability reporting standards. In February 2021, it announced that there had been positive public feedback and it would continue its initiative of working to establish an International Sustainability Standards Board (ISSB). In April 2021, it released a Feedback Statement summarising the public comments along with an exposure draft covering the necessary proposed changes to its constitution. It has stated that it will provide investor-focused global sustainability standards relevant to enterprise value. The standards will initially focus on climate change before being extended to other sustainability areas, and existing material in the sustainability area will be considered. The ISSB board is scheduled to be announced in November 2021. The IFRS Foundation has already established a technical working group which brings together the IASB, IOSCO (the global association of stock exchanges), TCFD, VRF (IIRC and SASB), World Economic Forum, CDSB, CDP and GRI. It is tasked to provide technical recommendations to the new ISSB “including further development of the prototype built on the TCFD recommendations”. See the IFRS Foundation website for the chronology and documents https://www.ifrs.org/projects/work-plan/sustainability-reporting/
What is enterprise value?
One of the buzzwords arising from all of the goings-on is the term ‘enterprise value’ – it’s a must-know term and it’s here to stay. It first appeared in the Reporting on Enterprise Value paper and since then it frequently pops up in many and varied places. In the Reporting on Enterprise Value paper, it is defined as: “ Market capitalisation plus net debt, where market capitalisation is determined by the market via the company’s share price, which is in turn informed by its financial and/or operational performance. Enterprise value is therefore influenced by factors such as revenue, costs, assets, liabilities, cost of capital, and risk profile”. However, the following excerpt from the paper (page 16) is a bit more explanatory: “Users whose primary objective is economic decision-making need to understand an entity’s performance on the sustainability matters that are material for creating enterprise value over the short-, medium- and long-term. This includes identifying the sustainability matters which are reasonably likely to affect a typical company’s financial position (e.g., its balance sheet), financial performance (e.g., its income statement and cash flows) or risk profile (e.g., its cost of capital), all of which influence a company’s enterprise value. Such sustainability-related financial information is intended to provide a more robust information set to provide insight into the entity’s future performance and future value”. Sustainability matters are defined in the paper as all value drivers represented by the capitals in the International <IR> Framework with the exception of financial capital. It’s worth noting that the International <IR> Framework is the connecting force on the disclosures on enterprise value creation and erosion.
Nested materiality
Nested (or dynamic) materiality is another term that has received frequent mention of late. Broadly, see this as a system arising from and designed to show how the different views of materiality held by the major players can fit together. Related to enterprise value, materiality is described as “reporting on those sustainability matters that create or erode enterprise value”. See the IIRC website page for the nested diagram and more information https://integratedreporting.org/wp-content/uploads/2021/03/Integrated-Reporting-Capitals-and-SASB-Sustainability-Dimensions-March-2021.pdf But be aware that this version of materiality is still in shifting sands territory. The nests of materiality (i.e. what is material and to whom) has not yet been universally accepted.
Assurance
A part of the move to sustainability disclosures is the element of assurance. The information must be assurable to be seen as reliable by investors and others. One could also read in here that the integrated report will similarly move to assurance of the full report. See the recent finalisation of the three-year project undertaken by the International Auditing and Assurance Standards Board (IAASB) and their assurance guidelines https://integratedreportingsa.org/integrated-reporting/assurance/
In a nutshell of a nutshell
The initial end-game of all this is to get to a global system of corporate reporting that provides consistent, comparable, assured information for primary use by investors in their assessment of a company’s risks and value and their financial capital allocation decisions. Things are in place for this to happen with all the major global players seemingly firm in their commitment.