Recent Developments in Sustainability Reporting

Abstract

The Colin Ferguson Oration is the address given to attendees at the annual Australia Accounting Hall of Fame dinner and presentation evening.  It is an invited oration, whereby an eminent modern-day leader addresses the audience on matters at the intersection of business, government and the academe as they relate to the rich history, the current state and/or the future direction of the accounting profession. The oration is named in honour of our colleague Professor Colin Ferguson (1949–2014). Colin was the key figure driving the inception of the Australian Accounting Hall of Fame. In a decorated academic career, he worked tirelessly for many years and with great distinction at the intersection of accounting thought and practice encompassing auditing, forensic accounting, and accounting information systems, so it was only fitting that this oration is named in his honour.

This year's oration was delivered by Bill Edge, the current chair of the Auditing and Assurance Standards Board (AUASB), and a member of both the International Auditing and Assurance Standards Board and Australia's Financial Reporting Council (which he previously chaired), on 2 March 2022. Bill is a former partner at PwC who, in 2021, was inducted into the Australian Accounting Hall of Fame.

It is crucial that as a profession we continue to bring together academe, practitioners and standard-setters to explore relevant challenges and issues in our field. There are few current issues more salient for the immediate future of our profession than sustainability reporting – the topic of this year's oration. We are absolutely thrilled that Bill's oration is published in the Australian Accounting Review (AAR), a journal that for a long time has occupied a unique and valued position in our professional landscape. We thank sincerely the editors of the journal.

Good evening. For the context of this talk, so that you can understand the experience that I bring to tonight's discussion, let me explain my background.

I was a partner at PricewaterhouseCoopers (PwC) for 18 years. I have experience as a standard-setter. I'm currently Chair of the Auditing and Assurance Standards Board (AUASB) and I was recently appointed to the International Auditing and Assurance Standards Board (IAASB). I've been involved in financial system oversight by virtue of being Chair of the Financial Reporting Council (FRC) in Australia, and I serve on its New Zealand equivalent, the External Reporting Board (XRB). I was also an academic for many years. I've interacted with accountants in many positions, roles and organisations, and I recognise that the audience tonight is a reflection of the breadth of the profession.

What I'm talking about tonight are some recent developments in annual reporting, in particular (what I call) sustainability reporting, which may have a significant effect on the accounting profession in Australia. I am excited about the opportunities that these developments bring, but I say that they ‘may have a significant effect’ because there are a few challenges ahead. In particular, there is a need for compromise, and there is a need for changes to be carried out in a timely manner.

Some events in 2021 (not Covid related) give me confidence that this is possible. For many years we have been discussing whether traditional financial reports should include more non-financial information. One term used for this information is ‘extended external reporting’, another term is ‘ESG reporting’ (referring to environmental, social and governance reporting) and a more recently used term is ‘sustainability reporting’. These terms are used interchangeably.

Reporting of this type has been voluntarily adopted for many years. In the 11th edition of its Survey of Sustainability Reporting, KPMG surveyed 5200 companies worldwide and found that 80% reported on sustainability (KPMG, 2020). Of course, the detail and the nature of the disclosures vary widely. Similarly, a PwC report titled ‘ESG Reporting in Australia – The full story or just the good story?’ reviewed ASX 200 companies in 2021 and found that 87% of them published substantive levels of ESG information, which was a considerable increase from 58% providing such information in 2020 (PWC, 2021).

At this point I must clarify the disclosures to which I refer when I use the terms ‘ESG’ and ‘sustainability’. Although current developments have started with climate-related disclosures, the end game could be much wider. It could include reporting on indigenous and human rights, modern slavery actions, biodiversity protection, data management and privacy, labour relations, occupational health and safety, security practices, anticorruption actions and diversity and equal opportunity policies. It is perhaps easier to say: all matters environmental, social and governance related. And we should also include the impact of these topics on reported financial information.

What is it that happened in 2021 that gave me confidence that sustainability reporting will bring opportunities and have a significant effect on the accounting profession? It was the global move towards harmonisation of these organisations and their reporting frameworks.

In June 2021, the International Integrated Reporting Council and the Sustainability Accounting Standards Board merged into the Value Reporting Foundation. Then in November 2021, the Value Reporting Foundation and the Climate Disclosure Standards Board announced their intention to consolidate with the International Financial Reporting Standards (IFRS) Foundation by 2022. In November 2021, the IFRS Foundation announced the formation of the International Sustainability Standards Board (ISSB). This announcement was made at COP26, the 2021 United Nations Climate Change conference held in Glasgow. So, now we have two boards under the governance of the IFRS Foundation: the International Accounting Standards Board (IASB) and the International Sustainability Standards Board (ISSB). I have mentioned many organisations, but they are important to understanding the background of where we are today.

In 2021, the IFRS Foundation formed a Technical Readiness Working Group of leading organisations, which prepared and published two prototype standards. One prototype standard was on general requirements for the disclosure of sustainability-related financial information, and the other prototype standard was for climate-related disclosures. Without going into too much detail, the climate-related disclosures prototype covers information that allows users to assess climate-related risks and opportunities with respect to a company's governance, strategy and risk-management, as well as metrics and targets. It also includes industry-specific disclosure requirements for 12 industries.

So, the new board of the ISSB, which at this stage only has a Chair and a Vice-Chair (applications for members are being considered as I speak), already has two significant prototype standards as it begins its work. The IFRS Foundation Constitution allows the Chair and Vice-Chair to expose standards for comments without a full contingent of ISSB members. For these reasons, we can expect to see an Exposure Draft in early 2022. This is indeed lightning pace in standard-setting terms.

Europe is another major player in this area. In April 2021, the European Commission adopted a proposal for a Corporate Sustainability Reporting Directive, which envisages the adoption of EU Sustainability Reporting Standards to be drafted by the European Financial Reporting Advisory Group (EFRAG). In September 2021, the EFRAG made their climate standard prototype working paper publicly available, with the first set of standards expected to be issued by September 2022.

Closer to home, New Zealand's Financial Sector Amendments Act, passed in October 2021, allows the XRB to issue a climate disclosure standard. A formal exposure draft is expected to be published in mid-2022, with a final standard expected by the end of 2022.

Turning to Australia, I am pleased to advise that in December 2018 the two Australian boards tasked with setting accounting and accountability standards, the Australian Accounting Standards Board (AASB) and the AUASB, issued non-mandatory guidance on assessing the financial statement materiality of climate-related and other emerging risks disclosures. The developments are notable because climate-related disclosure is a huge political issue both globally and in Australia, and it is very rare that an accounting topic has such public policy relevance. What do these developments mean for Australia?

Australia has no national approach to sustainability reporting. This has led to a diverse range of legislation and guidance being developed by individual Australian government and industry bodies, with reference being made to a wide range of international sustainability reporting standards and frameworks. Some examples include the National Greenhouse and Energy Reporting Act (2007), the Water Act (2007), the Modern Slavery Act (2018) and the Workplace Gender Equality Act (2012). Much of the voluntary disclosure in Australia has been made by choosing from the various frameworks that already exist – frameworks I mentioned earlier. This means that much of the disclosure lacks comparability and consistency. The drawback of the voluntary disclosure approach is that it allows the development of what is called ‘green washing’ – the practice of using marketing spin to ‘disclose’ how environmentally friendly a corporation or its product is. This is the key reason we need a framework that is agreed upon by interested parties.

In pursuit of that goal, in November 2021, the FRC, the AASB and the AUASB issued a Position Statement that the Boards will seek to adopt global developments within the current institutional framework in place for financial reporting. The AASB will develop reporting requirements, the AUASB will develop assurance requirements and the FRC will continue to provide strategic oversight of the Boards.

Accordingly, at this time, the Boards do not support establishing a new body that would specialise in developing sustainability reporting requirements. The Boards will maintain their close links with the IFRS Foundation and the development of the ISSB to ensure that Australia's interests are appropriately represented. That includes supporting (local) applicants to be members of the ISSB. In reference to having local members on the ISSB, I am pleased to observe that Sue Lloyd, from New Zealand, has been appointed Vice-Chair of the ISSB.

In November 2021, the AASB released an invitation to comment (ITC) seeking views on whether the AASB should support voluntarily the adoption of the recommendations made by the Task Force on Climate-Related Financial Disclosures, which is the basis on which the ISSB will develop its standards. Because this referred to climate-related disclosures only, it was only meant to be a temporary solution. The purpose of the ITC was to simply provide direction to preparers seeking to take immediate action.

To me, these events are as significant as the transformation that Australian financial reporting went through in the early 2000s. In 2001, the IFRS Foundation was formed and the IASB was established. In 2005, Australia chose to adopt the IFRS standards as a basis for Australian financial reporting standards. And in 2006, Australia chose the International Standards on Auditing (issued by the IAASB) as a basis for Australian auditing standards. So, we became an adopter of international standards. During this time, some key individuals in the financial reporting system went on to be recognised by this Australian Accounting Hall of Fame for their contributions to this process, among other things, of course.

I am excited about the opportunities and challenges in future developments around sustainability reporting. I'd like to finish my address by exploring these. Every area of future development is both an opportunity and a challenge.