IPA

A reporting revolution

MATTHEW CAVICCHIA is sustainability and policy adviser at the Institute of Public Accountants. Environmental, social and governance (ESG) issues have emerged as central for business, to the extent that the notion of corporate social responsibility (CSR) is increasingly obsolete. The management of ESG is strategic and at the core of everything an organisation says and does, whereas CSR was considered an optional act of exceeding legal obligations to benefit society or the environment, or both. The accounting profession plays a significant role in ESG as there is a demand for sustainability-related disclosures to be reliably captured and communicated – skills that underpin the profession’s existence.

The problem The past decade saw several organisations introducing standards designed to assist entities with sustainability-related disclosures, including the Global Reporting Initiative, Sustainability Accounting Standards Board standards, Climate Disclosure Standards Board framework and the Task Force on Climate-related Financial Disclosures (TCFD).

Meanwhile, the Integrated Reporting Framework completely reinvented the annual report, encouraging organisations of all sizes to adopt an integrated mindset and explore how their entity creates, maintains and erodes value over the short, medium and long term.

However, the absence of standardisation created overlapping guidance and downright confusion, deterring many organisations from engaging with sustainability-related information and reporting.

The IFRS Foundation and the International Sustainability Standards Board The International Financial Reporting Standards (IFRS) Foundation is a not-for-profit organisation committed to establishing high-quality, global accounting standards. At COP26 in November 2021, the IFRS Foundation launched its second standards-setting board – the International Sustainability Standards Board (ISSB), dedicated to delivering globally comparable sustainability disclosures building on the existing alphabet soup of standards and frameworks.

In late March 2022, the ISSB released two draft standards for consultation – the first focusing on general sustainability disclosures, while the other is specific to climate-related disclosures. Both standards capitalise on the four content elements of the TCFD framework – governance, strategy, risk management, metrics and targets – which should, preferably, be presented with an integrated approach.

Is there any guidance for SMEs? The ISSB has established disclosures of sustainabilityrelated financial risks and opportunities to inform the decision-making of investors.

Despite only certain types of organisations being mandated to prepare external reports, this has never made the role of accounting and monitoring financial performance obsolete for small and medium-sized enterprises (SME). Considering the ISSB standards from a management accounting perspective, they could be used to guide the effective management of sustainability-related risks and opportunities internally. Furthermore, there will always be other stakeholders, such as customers, employees, suppliers, banks, lenders and so forth, with a vested interest in how businesses of all sizes manage these risks and opportunities. For example, sustainability performance is an increasingly common criteria to access finance.

Does climate discriminate? Yes, it does. For example, we know countries with a higher reliance on agriculture as a proportion of their gross domestic product are at an increased risk of being impacted by climate change. While the location of a business is one example in which the extent of climate risk and opportunity is unequally distributed, there will be very few businesses that go entirely unaffected by climate change.

The ISSB effectively distinguishes between physical risks and transition risks of climate change. Physical risks include the damage and interruptions caused by increased instances and/or severity of floods and other extreme weather events. While some businesses will face minimal physical risks, transition risks are inescapable. Transition risks capture the changing regulatory environment and market dynamics that stem from decarbonisation and gradually stronger action on climate. Examples include access to finance, changing customer demands, talent retention and the adaptability of competitors in the evolving marketplace.

Thus, while SMEs may avoid mandatory disclosure requirements, there is an exciting opportunity for these smaller organisations to leverage global developments and better understand their ESG-related risks and opportunities. Rather than waiting for specific SME guidance, the ISSB presents a chance to level up without reinventing the wheel.