Sustainability reporting as a driver of a sustainable economy
How can private sector auditors facilitate a viable and transparent transition to climate neutrality? This is a key question for Olivier Boutellis-Taft, chief executive of the umbrella organisation for professional accountants, Accountancy Europe. He has diverse experience relevant to this profession and in EU affairs. He believes accountants and auditors need to play their role to put sustainability at the heart of decision-making, both in the private and public sector. For him, the audit profession needs to work with businesses and governments to achieve this goal.
By Olivier Boutellis-Taft, Accountancy Europe
Addressing market failures
The planet is in crisis: ecosystems are massively and rapidly being destroyed, the climate is deteriorating, geopolitics are at a tipping point, and, in many countries, societies are fragmenting. Study after study confirms that our impending doom is becoming a credible scenario (see Figure 1). This is not exaggeration for effect: there is now indisputable scientific evidence that continuing on a path of endless growth is suicide. It is time to take action.
Figure 1 — Timeline of climate warnings
Measuring environmental, social and governance (ESG) impacts is the first step to correct market failures that perpetuate short-term thinking. Reporting on these non-financial matters helps redirect markets and investors. This transparency will help us better identify long-term risks and make sustainable choices. Investors need high-quality, comparable non-financial information (NFI) to fully assess the risks and opportunities of their investments. They also need assurance on the reliability of that information.
We must not only demand this of the private sector. The public sector needs to take action and measure its ESG footprint as well. After all, EU Member States spend on average 45% of their GDP on providing public goods . The public sector controls many key areas directly affecting climate change, such as power generation, transport infrastructure and waste disposal. It also has the legislative power to drive forward not just sustainability and good governance in public sector goods and services, but in the wider economy as well.
Box1- Accountancy Europe
Accountancy Europe unites 51 professional accounting organisations, representing approximately one million accountants, auditors and other financial advisors from 35 countries.
We translate our members’ experience from across Europe to inform the European policy debate, particularly in the areas of sustainable finance, SMEs, tax reporting and audit. Our mission is to influence decision-makers, help the profession shape its future, and facilitate cooperation amongst our members.
Accountants and auditors play an instrumental role in supporting both businesses and governments to put sustainability at the heart of decision-making.
Non-financial reporting is still evolving
There is much potential for effective NFI reporting to bring greater transparency. This would allow boards to adopt sustainable strategies, investors to make informed investment decisions and policymakers to develop appropriate legislation.
However, there are now hundreds of NFI initiatives that are leading to confusion and increasing the potential for further greenwashing. Businesses can use any NFI framework that allows them to selectively disclose only the positive side of the story. For an effective response to these global issues and stakeholder demands, we need to improve NFI reporting, through harmonisation and legislative initiatives. If consistent, clear and comparable reports are available, corporate governance can begin to make the right decisions to ensure the shift to a sustainable economy.
This lack of market transparency and comparability of NFI reports damages public trust in business. It stands in the way of effective policymaking and regulation, which are essential to address the big challenges we face as a society.
Getting to better non-financial reporting In Europe…
The European Commission has recently announced that it will support a process to develop European non-financial reporting standards. The Commission has not yet disclosed all the details, but it intends to extend an invitation to the European Financial Reporting Advisory Group to begin the preparatory work for these standards. The intention is to build on the existing reporting initiatives, using the elements that work best.
In addition, and as part of the Green Deal, the Commission intends to revise the Non-Financial Reporting Directive (2014/95/EU) (NFRD). As a first step in this direction, Accountancy Europe recommends five steps to revise the NFRD and strengthen non-financial reporting requirements. Specifically. we see the need to:
- expand the scope beyond large publicly listed entities (PIEs)
- indicate a minimum set of mandatory reporting criteria
- require companies to disclose their non-financial information in the annual management report
- introduce minimum reporting criteria for forward-looking disclosures and
- ensure the reliability of reported information
Accountancy Europe has long been dedicated to this agenda. We worked on non-financial reporting and on related assurance aimed at bringing credibility to this reporting. Recently we published a Sustainable Finance Call to Action asking for clearer direction at EU level to encourage the development of NFI reporting in Member States.
… and in the world
There is not a financial planet and a real planet: these are one and the same. Financial and non-financial information are intimately connected, and it makes no sense to consider them separately. Corporate reporting standards also need to be interconnected. However as mentioned above, the proliferation of NFI reporting initiatives has overwhelmed stakeholders. Although work on a European non-financial reporting standard and revising the NFRD are encouraging, they remain regional.
As part of its cogito series that aims to stimulate policy debates, Accountancy Europe published in December 2019 a discussion paper on Interconnected Standard Setting for Corporate Reporting. The paper outlines solutions that would:
- address urgent global issues and provide a core set of global metrics for non-financial information
- strengthen governance through an enhanced collaboration of the public and private sector for oversight and standard setting
- transform existing structures to accommodate additional players that would effectively address broader stakeholders’ needs
- provide an effective connection between financial and non-financial reporting with the aim of addressing the ability of companies to create long-term value and
- incorporate technology from the start
Different options are still up for debate but the need for consolidation of NFI standards and for ensuring an interconnected approach, focused on long-term value creation and stakeholder needs is urgent. As we noted in previous work, presentation of the reports is also important and will need simplification and refocusing on the most material and relevant information.
Beyond corporate reporting
So much greenwashing is going on that more and more stakeholders are calling for independent assurance on NFI. Since NFI reporting lacks global or regional harmonisation, it is not yet subject to the same level of assurance as financial information. As NFI reporting evolves, it is important to ensure that the information is verifiable or can be verified in the future. Currently, professional accountants approach NFI assurance engagements in different ways, due to the different levels of maturity in NFI reporting. In the report Responding to assurance needs on non-financial information, we discuss the challenges and possible solutions to NFI assurance engagements.
Given the magnitude of the challenge, it is uncertain that transparency alone will produce the necessary paradigm shift. Markets have proved to be a great transformative force: we need to leverage their power to move towards a sustainable economy. Changing how the economy operates starts with how businesses are run; corporate governance is therefore instrumental.
Boards have the power to transform their businesses. Investors should give boards space to start this change and make sustainability the cornerstone of business decisions. Policymakers and regulators also can play a role in shaping how business is done.
In 2019, Accountancy Europe published 10 ideas to make corporate governance a driver of a sustainable economy . In this paper, we look at how boards need to change and what actions policymakers and regulators can take. This includes, transforming business models, changing board composition, rethinking the role of regulators, moving from shareholder protection to stakeholder protection. The aim is to achieve integrated thinking that will embed sustainability at the heart of decision-making at all levels.
The role of accountants
The accountancy profession supports the move towards a sustainable economy. With NFI reporting, accountants can support companies and governments in establishing robust indicators and processes for measuring and reporting their ESG performance. This includes improving internal control processes and evaluating their quality.
Accountants can help improve how a company communicates with its stakeholders, building on legislative requirements and best practices. To inform investors for their capital allocation decisions, reporting should disclose relevant financial and non-financial information.
Independent assurance is key to ensuring that information is trustworthy so that the market can function efficiently. It can enhance the quality and reliability of non-financial information that companies report. Accountants have the skills to audit information and processes independently. Accountants identify issues and report on the company’s material weaknesses, which leads to improved processes.
In their different capacities, professional accountants make critical contributions to corporate governance. In business, accountants are found in key oversight roles, such as: CEOs, Chief Financial Officers (CFOs), non-executive directors, audit committee members, as well as officers in accounting, reporting, internal control or tax functions. As external auditors, accountants provide assurance on information reported by business with a high guarantee of independence, objectivity and competence.
Accountants are also well placed to take on new roles, such as Chief Value Officer (CVO) in place of a CFO. The role would entail a broader perspective on value creation and fully integrate ESG factors with financial performance. The CVO would help transform how the business is run and ensure that the business model shifts towards sustainability.
Good business decisions start with reliable information. The accountancy profession has leveraged its expertise in the field of NFI and now has long-standing experience1 in helping companies make the right changes to reduce their environmental footprint — and costs. As businesses change their benchmarks for success, accountants contribute by measuring impacts, disclosing information, and adding credibility to what is reported.
In the public sector, financial management is improved by the adoption of accruals accounting and budgeting. Accountants are a crucial component in implementing accruals accounting and in providing assurance that public services are delivered in an efficient and cost-effective manner. Accountants can be good partners in developing the public sector’s ESG reporting. And not only for national governments; accountants can support the EU Institutions in shaping policies to encourage Member States in this area.
Act now to safeguard tomorrow!
Accountancy Europe started the debate on the future of corporate reporting in 2015. Since then, we have led the thinking on corporate reporting. In addition to the initiatives highlighted above, we have noted the need for innovation and for leveraging technology; we called for the set-up of an EU Corporate Reporting Lab and; outlined that corporate information was of interest to a wider variety of stakeholders and not only shareholders.
We are striving to achieve better non-financial reporting and support integrated reporting. Shareholders and stakeholders are realising that non-financial reporting can shed extra light on financial reporting and that only the integration of the two makes sense. We are pleased to see that the EU’s corporate reporting agenda is following the same lines.
Our economy brings increasing development and wealth but also causes natural resource depletion, pollution, overconsumption and social unrest to a level that is not sustainable anymore. The only way forward is changing how the economy operates today.
This article was first published on the 2/2020 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors
