It's all (getting) connected

IOSCO encourages standard-setters’ work on assurance of sustainability-related corporate reporting

The International Organization of Securities Commissions (IOSCO) issued a press release to state that it supports the work of international audit and assurance standard setters – specifically the International Auditing and Assurance Standards Board (IAASB) and the International Ethics Standards Board for Accountants (IESBA) – on assurance of sustainability-related corporate reporting. I find this noteworthy because it illustrates the interconnectivity between regulations, standards for reporting, and standards for assurance in the world of disclosures. It’s also illustrating the interconnectivity – perhaps soon moving to integration – between financial and sustainability reporting. The challenges IOSCO identifies as particular to sustainability disclosures are worth noting:

• more extensive narrative component,
• more forward-looking information,
• more information coming from issuers’ value chain and therefore outside of their internal controls,
• different formats and across different documents.

Of course, the underlying question is whether these should be, or whether they even can be, assured. Of particular note is the request (let’s call it that) to develop assurance standards that build on what already exists, to work collaboratively with all sustainability assurance framework- and standard-setting organizations, to create standards that can be used by both audit and non-audit firms, and to ensure the connectivity in assurance services between sustainability-related information and financial reporting, regardless of whether these services are provided by the same assurance provider. It’s good to remember that the ability for the IFRS Sustainability Disclosure Standards to support the application of a robust assurance framework is one of IOSCO’s criteria for assessing whether it will endorse these standards when they are final.

“The entire sustainability-reporting ecosystem is evolving. Stakeholders will need to adapt to new sustainability-related reporting standards and to enhanced expectations among increasingly sophisticated users of sustainability-related information across financial markets. IOSCO will continue to support its members and other stakeholders in the journey to improve the consistency, comparability, and reliability of corporate sustainability-related reporting, including the assurance of sustainability-related information.”        

Read the release

Towards a Conceptual Framework for Sustainability Reporting

The Capitals Coalition is proposing to develop a Conceptual Framework for Sustainability Reporting (CFSR) to determine useful information to sustainability, by applying the logic and structure that the IFRS uses in its Conceptual Framework for Financial Reporting (CFFR). A conceptual framework is the basis on which reporting standards are created. Hence, this work is intended to support the current drafting of the IFRS Sustainability Disclosure Standards and the European Sustainability Reporting Standards. The Capitals Coalition, which has already produced the Natural Capital Protocol and the Social & Human Capital Protocol (and associated guidance, tools, and resources) is currently combining these into one integrated capitals protocol and developing the links between decision-making and disclosure. This discussion paper on a CFFR is part of its process.

I believe this is an extremely interesting proposal and I encourage you look at the annotated draft of the Conceptual Framework for Sustainability Reporting based on the text of the one for financial reporting… Eye opening! In my opinion, it’s a key piece of the puzzle to transforming sustainability reporting practices, especially for the change in thinking that it represents. First, it’s a glimpse into the future of impact reporting, where useful information will provide a measure of impacts and dependencies on the capitals – in other words, “changes to those capitals that have been caused by the decisions of the managers of an entity” – so that users can properly evaluate the performance of the business and the prospects of its business model. It will show how any trade-offs have been made between capitals, building on existing guidance in the Principles of Integrated Capitals Assessments, and how capital is being maintained. Second, it briefly mentions a key concept that public policy would be required to set limits on thresholds and allocations and the extent to which the above trade-offs can be made. (This is where corporate activity gets tied into the achievement of sustainability.) Third, it argues that by extending the definition and calculation of returns on capitals, all stakeholders – including external investors (not just shareholders), suppliers, employees, and consumers – can be considered “investors” and, therefore, the intended primary users of the information disclosed. Finally, it argues that because financial capital and financial returns are a means to an end and that the purpose of generating financial returns is to enable changes in other capitals, the sustainability-related information would be an input to financial information, and not the other way around. Like I said, eye-opening!

Access the documents

Read the annotated draft Conceptual Framework for Sustainability Reporting