Finding the fit
The CRD’s initial focus is on getting some order into the reporting of nonfinancial information and working out how it fits with financial information. “At that stage, you can start looking at an annual report that has this information in one document, encompassing both financial and nonfinancial information,” he says. “One complements the other.”
Another key issue for the CRD is materiality. “Companies should only report on things that are relevant to them, not just have a checklist of things to report on,” says Mackintosh. “It has to be relevant to the company itself, and that goes back to who you are reporting to. The IASB, for example, reports for providers of capital, whereas the Global Reporting Initiative would say it is reporting for society, so that’s a broader range of users.”
Another looming challenge is possible pushback from large corporates, which are already complaining of “reporting fatigue,” according to Mackintosh. “It’s quite possible there will be some resistance,” he says. “Every time there are changes, you always get the message that ‘you can’t do this, it’s too much’. And often, it can be legitimate. Standard setters do on occasion require things that aren’t very relevant.”
In February 2019, CRD participants released a position paper on the Sustainable Development Goals (SDGs) – a blueprint of 17 targets devised by the United Nations to achieve a better and sustainable future for all – and the future of corporate reporting. The paper identifies how corporate reporting can illustrate which SDGs are relevant to a company’s business model, enabling both companies and investors to focus on those SDGs most likely to impact financial performance.
“It’s a good basis for beginning the debate,” says Mackintosh. “It’s a starting point for what could be reported, what is relevant and what cost benefits are related to SDGs.”
Nevertheless, there is criticism that things are not moving fast enough. “People are coming to us saying, ‘couldn’t you do something more quickly and with broader ramifications?’ That’s another challenge,” says Mackintosh.
So should there be a single global standard setter on corporate reporting that takes in both financial and nonfinancial reporting metrics? Mackintosh admits he is sympathetic to that view.
“You’ve got to have a dream, as the songwriter said. If you don’t have a dream, then how are you going to have a dream come true? In an ideal world, at an ideal time, yes, that is the way I would personally like to see things pan out.”
However, he says the CRD has deliberately not pushed such a “catch-all” solution because of concerns that it would deter people from joining in the dialogue. “I’m not trying to coerce people into things they don’t think are right, either for them or for the overall market,” says Mackintosh.
Moreover, any rationalization of standard setters could prove challenging to bring about. Many entities might be reluctant to be voluntarily subsumed into a larger organization.
“Change could come from the bottom up,” Mackintosh predicts. “Organizations might decide to merge if they have a proper look at each other and their goals. There have already been a couple of mergers that have narrowed down the market, and that makes taking additional steps toward convergence easier.”
The fact remains that many observers, both on the inside and the outside, are far from happy about the present situation and are asking why something can’t be done. Mackintosh believes the pressure from the market – from both funders and investors – will ultimately forge consensus, even if this falls short of full integration.
“But it’s not going to be simple,” he concludes. “These organizations have a rationale for what they have done and are not going to give that away unless they are assured that what comes next is better than the status quo.