Hans Hoogervorst, chair of the International Accounting Standards Board (IASB), has indicated the board intends to play a role in developing climate-change related financial reporting, but will not move in to standard setting in this area, reports Pat Sweet

He cautioned against exaggerated expectations for sustainability reporting as a catalyst for change in the absence of policy and political intervention.

Speaking at a conference in Cambridge, Hoogervorst said he was clear that the IASB is not equipped to enter the field of sustainability reporting directly, saying setting standards in this area ‘requires expertise that we simply do not have.’

However, Hoogervorst acknowledged that ‘sustainability issues can already have an impact that needs to be reflected in financial reporting as it currently is’. He  cited a paper from the Australian Accounting Standards Board that discussed when climate-related disclosures are material, and therefore should be included within the IFRS financial statements.

The paper mentions that in particular industries, the carrying value of assets—such as property, plant and equipment and assets recognised in relation to mineral resources—could be overstated if the impact of climate-related risks is not properly taken into account.

Where climate-related risks could have a significant impact on a company’s operations, information about how this has been factored into impairment calculations would be relevant to the users of the financial statements.

Hoogervorst said: ‘In conclusion, as the effects of climate change become more prominent, they will become more and more visible in the financial statements.

‘However, many sustainability issues may only emerge in the long run. In such cases they will tend to escape the financial statements, which are essentially backward-looking.

‘But even in such cases we believe the IASB has a role to play, namely through our efforts to improve what we like to call “broader financial reporting”.’

Hoogervorst pointed out that IASB’s management commentary practice statement, originally published in 2010, is intended as a non-mandatory guide for how to write the front of an annual report in order to a broader context for the financial statements.

IASB is currently working on a major overhaul of this practice statement, and Hoogervorst signalled that companies will be required to tell how sustainability issues, including climate changes, may impact their business if that impact is material.

However, Hoogervorst said: ‘There are simply too many standards and initiatives in the space of sustainability reporting. This leads to a lot of confusion among users and companies themselves.

‘People may be forgiven for not making heads or tails of it. Moreover, with so many standards, the potential for disclosure overload is enormous. Consolidation is clearly needed.’

He also cautioned against ‘exaggerated expectations’ about sustainability reporting as an agent for change.

‘Let us not forget that full transparency did little to curb excess in corporate remuneration. Equally, we should not expect sustainability reporting to be very effective in inducing companies to prioritise planet over profit. Greenwashing is rampant,’ he said.

However, he concluded: ‘In the end, financial incentives remain crucial in combatting climate change. For this reason, I strongly believe that the most promising strand of sustainability reporting comprises those standards that focus on the investor and on the impact of sustainability issues on the future returns of the company.

‘This is the type of sustainability reporting which will fit well with our management commentary practice statement, rather than the reporting that focuses primarily on a company’s contribution to the public good.

‘While some investors may be swayed to invest in companies that show good corporate responsibility scores, ultimately the impact of sustainability issues on future financial returns will have a much bigger impact on investment decisions.’

As a final point, Hoogervoost noted that ‘sustainability reporting requirements cannot get politicians off the hook in terms of the need for credible climate-change policies. It is good that the G20 is promoting climate-related disclosure; it would be a thousand times better if they could agree on the introduction of a kerosene tax.’

IASB chair speech on sustainability reporting

Report by Pat Sweet

Source: Accountancy Daily