Nonfinancial reporting: The big debate

The question of whether corporate reporting on nonfinancial matters should be mandatory has been brought into sharp focus in the past decade since the global financial crisis. There is also the question of who should take responsibility for setting the standards.

The issue emerged in December in a debate run by the Oxford Saïd Business School in the Oxford Union chamber in central Oxford in the UK.

At the heart of the debate was whether current accounting standard-setters globally have the skills, expertise, and experience to set standards beyond traditional financial reporting.

A powerful lineup of four speakers for both sides of the argument dissected the motion, “This House believes that corporate sustainability reporting should be mandated, and standardised by FASB [US Financial Accounting Standards Board] and IASB [International Accounting Standards Board], for it to be most useful for investors.” On the night, a packed audience mainly of MBA students and academics decided that the motion should be carried.

Speaking in support of mandated sustainability reporting with guidelines overseen by current standard-setters, Anne Simpson, investment director, global governance, for the California Public Employees' Retirement System, the largest public pension fund in the US, asked, “Why don’t we measure what matters? ... Because there are no [nonfinancial] standards, you can’t compare one company to the next.” She added that taking a voluntary approach to sustainability reporting would result in companies’ only providing “good news”.

Let the market decide?

Tom Quaadman, executive vice-president of the US Chamber of Commerce’s Center for Capital Markets Competitiveness, in opposing the motion, stressed the importance of environmental, social, and governance (ESG) reporting but said that research by the US Chamber had found that “a markets-based approach is the best way forward”.

The second speaker in favour of the motion was Paul Druckman, former chief executive of the International Integrated Reporting Council. He said that asset management firm Schroders had estimated that global economic losses due to climate change could build to $23 trillion [over the next 80 years]. “We need to make sure that climate change, biodiversity, and inequality are dealt with in the future. …This is not something that we can leave alone. There is an urgency.”

“Perfect can be the enemy of the good,” Druckman said. He added that while the IASB and FASB were not perfect places to form nonfinancial standards, “currently there is no alternative — they have credibility and they have process”.

Bob Herz, CPA, a former FASB chair and a former IASB member, in opposing the motion, said changing the two bodies’ remit would take time. Further, he contended that they did not have the necessary “bandwidth” or sustainability “expertise” and that the market had already moved with urgency. People, he said, should instead back the independent Sustainability Accounting Standards Board’s standards, which were launched in November at the London Stock Exchange.

A separate board could be set up under the trustee structures governing the IASB and FASB, said Ian Mackintosh, a former IASB vice-chair. Speaking for the motion, he acknowledged there would be a reputational risk for the two governing bodies — the International Financial Reporting Standards Foundation and the US Financial Accounting Foundation. But he said, “You don’t avoid risk — you keep on working and you use the expertise around the world that exists.”

Harvey Pitt, former chairman of the US Securities and Exchange Commission, speaking against the motion, said the issue was a real-world one rather than an academic one. He said: “Doing something rapidly makes absolutely no sense if all it would do would be to confuse everyone as to what must be disclosed, how it must be disclosed, when it must be disclosed.”

Jonathan Bailey, head of ESG investing at global investment firm Neuberger Berman, also spoke against the motion. He said voluntary disclosure is growing at an extraordinary rate — with over 85% of the S&P 500 providing that information today.

Unintended consequences

The reality, Bailey said, is that investors are using those data. He warned of unintended consequences of FASB and the IASB setting standards for sustainability reporting.

He said that at the moment, most of these data are provided voluntarily and are not formally audited. “If you had to give detailed forward-looking assumptions on every possible set of scenarios that you think could happen to your company and then it had to go through legal and compliance, I can guarantee investors would not be getting that information,” he said.

He said that a system for sustainability reporting was needed “that can evolve at the pace at which companies’ and society’s expectations of companies are evolving”.

The final speaker in favour of the motion, Sir Callum McCarthy, former chair of the UK’s Financial Services Authority, rejected the idea of leaving sustainability reporting “to voluntary response, to ill-defined variety of market demands”. He said it was not the best way to provide information that is useful and capable of being interpreted by investors and interested parties.

The Association of International Certified Professional Accountants is a further advocate for standards for nonfinancial information to help support investor decision-making. David Hackett, the Association’s technical policy manager, who was not a speaker at the event, said, “In Europe, the Nonfinancial Reporting Directive was introduced for large companies from the 2017 reporting year, which has served to formalise reporting in this area.” He said regulators across the world “are looking at how to push this issue forward” and that management accountants have an important role to play in ensuring an integrated approach to reporting and decision-making within companies.

The Oxford debate was chaired by Lady Lynn de Rothschild, founder and chief executive of the Coalition for Inclusive Capitalism, and can be viewed on YouTube. It followed a green paper published by the Oxford Saïd Business School in October, Should FASB and IASB Be Responsible for Setting Standards for Nonfinancial Information?, which involved interviews with 50 international experts. In a follow-up white paper, report authors professors Richard Barker and Robert Eccles plan to set out how best to ensure that capital markets have the nonfinancial information they need to function in the best possible way.

— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.