International developments in corporate reporting … follow the story

Reshaping the corporate reporting system

Over the past few years…

Since 2019 there has been a concerted effort to achieve a global comprehensive corporate reporting system that brings in sustainability reporting. A big part of this has been ensuring consolidation among the many 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 (known as the ‘gang of five’) released the Reporting on Enterprise Value – the paper offered 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 was significant, offering a prototype for future global sustainability reporting standards (for climate change and then extend to other ESG matters). The paper also initiated the term ‘enterprise value’ and enterprise value creation, preservation, or erosion.

The Value Reporting Foundation’s formation and then subsequent consolidation into the ISSB

In November 2020, the IIRC announced that it will merge with the US-based SASB in June 2021 to form the Value Reporting Foundation.  Their motivation for the merger was that the International <IR> Framework (Integrated Reporting Framework) offers the structure (the how) and the SASB sustainability indicators offer the metrics for measuring impacts and outcomes (the what).

At last count In 2021, over 2 500 organisations apply the <IR> Framework and almost 1100 organisations use the SASB Standards.

For the 9 June 2020 media release click here and you can access the FAQs on the merger via this link  https://www.valuereportingfoundation.org/about/faqs/ For the latest updates from the VRF see its website https://www.valuereportingfoundation.org/news/

The new kingpin is the International Sustainability Standards Board (ISSB)

Starting with a bit of history…..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 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 (biodiversity is next in line), and existing material in the sustainability area will be considered.

The ISSB was officially launched on 3 November 2021 at the COP 26 meeting in Glasgow. The ISSB issues IFRS Sustainability Disclosure Standards, starting off with climate change, and to be followed by other sustainability matters (eg biodiversity/nature).
Also announced was the consolidation of the technical expertise and resources of the VRF and the Climate Disclosure Standards Board (CDSB) into the ISSB (this process was completed in August 2022 – meaning that the VRF is no more and has now been completely absorbed). For the 3 November 2021 media release and FAQs click here.

When making the 3 November 2021 announcements, the Technical Readiness Working Group (TRWG) released three prototype papers:  General Requirements for Disclosure of Sustainability-related Financial Information Prototype, Climate-related Disclosures Prototype and its Supplement: Technical Protocols. available on the IFRS website (click here to view). Their significance is that they formed the basis of the Exposure Drafts released by the ISSB on 31 March 2022. The TRWG as a multi-body group (VRF, CDSB, IASB, TCFD and WEF) was tasked by the IFRS Foundation to develop a unified set of recommendations for consideration by the new ISSB.

See the IFRS Foundation website for the chronology and documents https://www.ifrs.org/projects/work-plan/sustainability-reporting/.

The ISSB Exposure Drafts and standards

On 31 March 2022, the ISSB released its first two Exposure Drafts for public comment. The first sets out general sustainability-related disclosure requirements and the other specifies climate-related disclosure requirements. The Exposure Drafts were open for public comment to 29 July 2022. The ISSB standards will be positioned as a global baseline for sustainability disclosure reporting. To access the webpage containing the two Exposure Drafts, click here. The ISSB received over 1600 public comments. The ISSB new standards are expected to be released in the first half of 2023. In April/May 2023 the ISSB will have a global consultation to determine its next projects and exposure drafts.

The weighty role of stock exchanges

Relevant to the international developments is the role of IOSCO, the International Organization of Securities Commissions (the global industry body of capital markets regulators), whose membership regulates the securities markets in 130 jurisdictions. IOSCO has put its influential weight behind the IFRS Foundation forming the ISSB. IOSCO chairs the IFRS Monitoring Board which oversees the IFRS Foundation Trustees, which in turn oversees the IASB and the ISSB.

The IASB’s Management Commentary Practice Note

In (im)perfect timing, the IASB in May 2021 released its Exposure Draft on the Management Commentary Practice Note for public comment to November 2021. For the IASB documents, click here. It is expected that the IASB and ISSB will consider this document in the light of the Integrated Reporting Framework.

The integrated report and the Integrated Reporting Framework

The IASB and the ISSB are the new bodies responsible for the Integrated Reporting Framework. They have encouraged continued use and adoption of the Framework in the interests of high-quality reporting. Also recognised is the international uptake of the Framework and integrated reporting. So, organisations should carry on using the Framework for their integrated reports. The staff of the IIRC have been absorbed into the IFRS Foundation group and support for the Framework continues. The old IIRC Council (the broad group of global organisations with an interest in corporate reporting) is now called the Connectivity and Integrated Reporting Council and is positioned as an advisory body to the IFRS Foundation on integrated reporting and integrated thinking.

The EU’s European Sustainability Reporting Standards (ESRS)

On 29 April 2022, the EU’s twelve exposure drafts European Sustainability Reporting Standards (ESRS) were released for public comment to 8 August 2022. The exposure drafts are based on double materiality. They cover: general principles, general disclosure requirements, climate, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy, own workforce, workers in the value chain, affected communities, consumers and end-users, governance, and business conduct. See https://www.efrag.org/lab3

This document, on the EFRAG website, usefully compares the draft ESRS to the ISSB Sustainability Exposure Drafts – view document by clicking here.

After considering the public comments received, the exposure drafts were released as twelve draft ESRS standards in November 2022 and submitted to the European Commission for consideration. They are expected to be enacted in June 2023. They will apply to many EU organizations as well as some non-EU companies operating in the EU that meet certain threshold criteria. The EFRAG media release of 22 November 2022, the link to the standards, and analysis of changes to the exposure drafts are available here The standards are expected to be phased in from financial years 2024. The ESRS will develop proportionate standards for SMEs as well as sector-specific standards in its second set of draft standards to be released for public comment in 2023.

The GRI

After taking part in the initial coming together of the ‘gang of five’ in December 2020, the GRI (Global Reporting Initiative) has retained its independence as a global body issuing sustainability reporting standards to meet the information needs of stakeholders (i.e. multi-stakeholders, including investors). This is a differentiating factor from the ISSB standards, however, the ESRS is in line with the GRI perspective. Another major differentiating factor to the ISSB is that the GRI has always focused on impacts on society and the environment; but again the ESRS is aligned with the GRI perspective. Note that the GRI standards are voluntary standards.

The GRI has memoranda of understanding with both the EU’s EFRAG (the body responsible for the ESRS standards) and the ISSB. This is in a bid to achieve interoperability and/or alignment.

What is enterprise value?

One of the new terms arising from the developments is ‘enterprise value’, which first appeared in the Reporting on Enterprise Value paper. The ISSB Exposure Drafts define enterprise value as: “The total value of an entity. It is the sum of the value of the entity’s equity (market capitalisation) and the value of the entity’s net debt.” And further (on page 22 of the General Sustainability Disclosure Exposure Draft): “Enterprise value reflects expectations of the amount, timing and certainty of future cash flows over the short, medium and long term and the value of those cash flows in the light of the entity’s risk profile, and its access to finance and cost of capital. Information that is essential for assessing the enterprise value of an entity includes information that is provided by the entity in its financial statements and sustainability-related financial information.”

Enterprise value is assessed by the users of general purpose financial reporting (seen by the ISSB as investors).

Double materiality

Double materiality is another term that has risen to The EU’s ESRS standards are based on double materiality, whereas the ISSB Exposure Drafts see materiality in terms of enterprise value.

Broadly, double materiality addresses impacts on society and the environment (so it covers sustainability impacts plus financially based materiality), while the narrower enterprise value view addresses only those sustainability impacts which can affect the organisation’s future cash flows, i.e. the financial perspective.

Putting everything together using the ‘global baseline’ approach

The IFRS Foundation and the ISSB are promoting their standards as the ‘global baseline’. Broadly, this positions the ISSB standards (that meet the needs of investors and report on the sustainability effects and impacts affecting the organisation over time) as the starting off point, to which other information can be ‘layered’ (this other information being for instance, regional sustainability reporting requirements such as the ESRS, the SEC etc, multi-stakeholder standards such as the GRI, plus a country’s specific national requirements and corporate governance needs).

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. Hence, the International Auditing and Assurance Standards Board (IAASB) is currently looking at standards for sustainability assurance. Expect more pronouncements in this area.