Four lessons on sustainability reporting from the ISAR conference
Sarah Wilkin, ICAS Director of Sustainability, reflects on attending the recent 39th session of the United Nations Conference on Trade and Development Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (UNCTAD ISAR) in Geneva.
Given the speed and scale of recent developments in sustainability-related reporting, the ISAR session covered good practices in and approaches to the practical implementation of sustainability reporting requirements, and a separate workshop focused on regional partnerships as a blueprint for maximising impact on strengthening national sustainability reporting practice and infrastructure.
Here are my key takeaways from ISAR on the topic of sustainability reporting, as well as some future considerations as we hurtle towards the publication of much anticipated new standards.
Top four takeaways
1. Alignment and collaboration on sustainability-related reporting standards
Mardi McBrien of the IFRS Foundation provided an update on the International Sustainability Standards Board (ISSB) Sustainability Disclosure Standards, IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information and IFRS 2: Climate-related Disclosures, noting they are expected to be issued as early as possible in 2023. She also reiterated the ISSB’s focus on meeting the needs of investors and therefore applying a definition of materiality related to financial performance, consistent with IFRS Accounting Standards, otherwise known as single materiality.
It is worth noting that this approach is in contrast to that taken by the European Financial Reporting Advisory Group (EFRAG) in the drafting of the European Sustainability Reporting Standards (ESRS). Saskia Slomp, EFRAG CEO, provided an update which confirmed that whilst seeking maximum alignment with the ISSB standards, the ESRS, which will be mandatory for approximately 50,000 companies in Europe from 1 January 2024, differed on the materiality point, instead opting for a double materiality approach. Simply put, double materiality considers both the impact of environmental, social and governance factors on a company, as well as the impact the company is having on the environment and society, therefore it goes beyond what is financially material to the company to also consider the impact of the company.
The concept of double materiality has been embedded in the standards issued by the Global Reporting Initiative (GRI) which recently celebrated its 25th anniversary and is widely recognised as a leader on sustainability reporting. According to a recent KPMG survey, 78% of the world’s biggest companies by revenue adopt the GRI Standards for reporting, therefore it would appear logical for the ISSB to more closely align and collaborate with the GRI.
EFRAG and the GRI have clear agreement on the double materiality concept therefore the ISSB should ideally follow suit in order to align their standards and avoid the potential need for businesses to report under multiple frameworks. Using the single materiality concept would essentially encourage business-as-usual and we need a radically different approach to ensure that positive and negative impacts are identified, in additional to financial returns, so that investors have a comprehensive picture of financial and non-financial performance and can direct capital flows accordingly.
2. Assurance on sustainability-related information
Isabelle Tracq-Sengeissen, Board Member of the International Auditing and Assurance Standards Board (IAASB) provided an update on development of an overarching sustainability assurance standard (“ISSA 5000”) that would build on ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information which currently covers assurance engagements on sustainability-related information. A standard specifically covering the audit of sustainability reporting is a welcome development, particularly given that assurance on sustainability-related information is being mandated in some jurisdictions (limited assurance is proposed to be mandated on ESRS with a transition to reasonable assurance in the future).
ISSA 5000 is proposed to cover all types of sustainability-related information including historical data, prospective information, narrative, figures, management reports etc. The new standard will be framework neutral so could cover assurance of information prepared in relation to standards issued by ISSB, EFRAG or GRI and will address both limited and reasonable assurance. The IAASB are targeting approval of an Exposure Draft by September 2023 with a comment period until February 2024 and final approval in December 2024 / March 2025.
The standard could also be used by accountants and auditors or other assurance providers. Whilst this makes sense in theory, as for example climate scientists may be better qualified to assure carbon emissions, this raises questions over having a level-playing field in terms of regulation, ethics and a common code of practice so as not to dilute trust and credibility in assurance provided. One potential solution is to incorporate such experts as part of multi-disciplinary teams that are overseen by accountants/auditors, as is commonly done when relying on experts with specialist skills. It is also important to incorporate the views of users of the assurance reports so the work performed is fit for their purpose. These concerns should be addressed as the standard is developed. ICAS shared further views on this topic in the recent paper Sustainability assurance: factor to consider.
3. Education of newly qualified accountants and CPD for those already qualified
As new sustainability reporting and assurance standards are developed and debated, with the expectation of adoption in the EU as soon as 1 January 2024, there is an increasing need to educate those currently pursuing an accounting qualification as well as those already in the profession in order to build knowledge and capacity around sustainability reporting. ISAR attendees encouraged engagement with education providers such as universities and knowledge-sharing mechanisms between practitioners and educational institutions. ICAS is currently updating its CA curriculum to embed sustainability throughout and offers a number of Continuing Professional Development courses relating to sustainability. Given the pace of change this is an area that will require professionals to update their knowledge on a frequent basis.
4. SMEs and developing countries
The ISAR conference was attended by delegates from a number of countries around the globe including those from developing countries where Small and Medium Enterprises (SMEs) are often the drivers of economic growth. Delegates from Guatemala and Uganda voiced a concern that there is a need for sustainability reporting standards to be tailored and proportional for SMEs around the globe in order to ensure they are not overburdened.
There has been a laudable level of progress on sustainable reporting in recent months. The development of new mandatory standards to consolidate the variety of largely voluntary reporting frameworks cherry picked by organisations to date will bring greater confidence and comparability in information reported. However, using a single materiality framework will encourage business-as-usual behaviour therefore closer alignment between the ISSB standards and the approach adopted by EFRAG and GRI to ensure reporting on impact is incorporated should be the end goal.
Furthermore, greater clarity is needed on regulatory and ethical requirements for those providing assurance on sustainability-related information so as to maintain credibility. The current work of The International Ethics Standards Board for Accountants (IESBA) is vital in terms of establishing appropriate ethics requirements in the IESBA Code. Complying with updated disclosure and assurance standards will require embedding sustainability within the training curriculum and CPD offerings for Chartered Accountants. Consideration should also be given to the need for proportional standards for SMEs in the future, particularly in developing countries.