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Now is the time to establish globally consistent standards for the reporting of nonfinancial information.
In brief
- There is currently no common agreement on what sustainability and other nonfinancial information companies should be measuring and how.
- To play an effective role in the battle against climate change, companies need to be able to report information using globally accepted sustainability standards.
- Existing sustainability frameworks, methodologies and metrics need to be consolidated to help accelerate progress toward a more sustainable future.
How can an organization know if it is being effective at reducing carbon emissions or narrowing its gender pay gap if it doesn’t set targets in these areas and measure progress in a way that can be benchmarked against peers?
You can’t manage what you don’t measure, and you can’t build trust in what you measure unless you abide by an agreed standard that meets the demands of stakeholders. This is particularly true for organizations attempting to measure the nonfinancial aspects of their performance.
The need for accurate, comparative and robust information to provide the necessary quality and coverage of nonfinancial disclosures is more urgent than ever as organizations continue pivoting their business models to become more sustainable. Purposeful organizations know that it is the right thing to do, and many have started appointing chief sustainability officers (CSOs) to help drive the formulation and execution of their transition.
The importance of this role has been recognized by the creation of the S30 forum, which brings together 30 leading CSOs. This has been launched by the Prince of Wales’s Sustainable Markets Initiative in collaboration with Ernst & Young LLP and communications company freuds.
Transparent measurement and trust
But organizations also want to meet the changing expectations of their customers, employees and investors, as well as the demands of politicians and regulators. They understand that transparent measurement and high-quality disclosures around sustainability performance underpin good business management and help to build and preserve stakeholder trust. Nonfinancial reporting disclosures may also be an important factor when it comes to accessing capital markets.
At the same time, investors are increasingly assessing company performance and their sustainable long-term value strategy using environmental, social and governance (ESG) factors, and looking for evidence that organizations are adequately considering environmental and social risks. They want standardized information that can help them gain a clear understanding of business models and compare organizations with others in the same peer group because this supports them to make informed investment decisions. Unfortunately, however, EY research has found that investors’ dissatisfaction with the information they receive on ESG risks has increased since 2018.
The challenge is not a lack of frameworks that organizations can use to measure and report on sustainability and other nonfinancial information. Rather, it is a lack of a consistent framework or set of standards that can be applied globally, in the same way that International Financial Reporting Standards (IFRS) are used for financial reporting. Today, there is no common agreement on what nonfinancial information companies should be measuring and how. What’s more, the information they provide is not necessarily subject to external assurance, potentially raising questions about its veracity.
Unsurprisingly, there are growing calls for the number of frameworks, methodologies and metrics that exist today to be consolidated. The ultimate goal is to bring together all the knowledge and experience gained over the years to develop a universally accepted set of globally consistent sustainability frameworks and standards, to meet common stakeholder demands.
Five framework and standard-setting bodies (pdf) —the CDP (formerly known as the Carbon Disclosure Project), the Climate Disclosure Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council and the Sustainability Accounting Standards Board — are already working together to try to establish a comprehensive set of frameworks and standards for sustainability disclosure. The ideal outcome for finance teams would be a clear understanding of the ESG data and methodology needed to collect and report on for these disclosures.
Another significant development is the consultation paper on sustainability reporting that was issued by the trustees of the IFRS Foundation in September 2020. The paper asked whether the Foundation should play a role in setting global sustainability standards, alongside its role as a financial standard-setter. It also contained proposals to set up a sustainability standards board that would be governed by the Foundation, provided certain conditions are met.
An urgent need for global sustainability reporting standards
Initial feedback to the paper was announced in March 2021 and confirmed an urgent need for global sustainability reporting standards and support for the IFRS to play a role in their development. A working group, including the International Accounting Standards Board, the Task Force on Climate-Related Finance Disclosures, the five bodies mentioned above and the World Economic Forum, has been formed to accelerate convergence in reporting standards with a focus on enterprise value reporting.
EY has played an active role in the development of sustainability standards through its involvement with the Embankment Project for Inclusive Capitalism and the World Economic Forum’s Stakeholder Capitalism Metrics. And EY also supports the proposal for a Sustainability Standards Board because it would facilitate the creation of a set of globally consistent sustainability frameworks and standards that could satisfy increasing demands from all parties (including regulatory requirements) while helping to establish connections between financial and nonfinancial information.
A set of global sustainability reporting standards could also help organizations — that can often be overwhelmed by the pace of standards development — reevaluate which aspects of ESG disclosures are most important to their business model and strategy. This, in turn, could help organizations focus on sustainability issues, measure and report more effectively on the long-term financial and nonfinancial value they create, and distinguish themselves among their stakeholders and society at large.
When a set of global sustainability reporting standards is created, it will raise the question of whether the information disclosed under those standards should be audited or subject to some other kind of external assurance. The trustees of the IFRS Foundation have said that in order to achieve globally consistent sustainability reporting practices, sustainability information reported by organizations will ultimately need to be subject to external assurance. This assurance should be of the numbers reported and the underlying activities and their outcomes.
So, for organizations to play an effective role in the battle against climate change — and build trust among stakeholders that they are acting sustainably — they will need to be able to report information using generally accepted global sustainability standards and have that information assured. EY reflected on the changing expectations of its own stakeholders — especially EY people — for building a better working world by announcing, in January 2020, plans to become carbon negative in 2021 and net zero in 2025.
While there is general agreement on globally consistent sustainability frameworks and standards from all of those that need to play a part — including organizations, auditors, standard-setters, regulators, investors and governments — now is the time to accelerate that collaboration and establish the frameworks and standards to help measure and accelerate progress toward a brighter, more sustainable future.
Summary
Today, there are a plethora of frameworks that can be used to measure and report on sustainability and other nonfinancial information. But there is no common agreement on what should be measured and whether that information should be subject to external assurance. What is needed is a consistent framework or set of standards that can be applied globally.
How EY can help
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Through enhanced corporate reporting, EY can support finance teams to meet demands for high-quality enhanced financial and nonfinancial information.
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