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.