My Comment Letter to the IFRS Foundation about the Consultation Paper on Sustainability Reporting

This naturally also leads to the clear misunderstanding about what is meant by ‘sustainability’ reporting. In your Consultation Paper, such reporting is depicted as ‘broadening’ the scope of information provided only to investors about non-financial issues—which may adversely affect corporate performance, hence their (financial) risks and eventual decisions. But the focus is again on investors only (as abundantly expressed in your text and language). One could argue to call it ‘non-financial reporting’ instead but given the very narrow perspective of what you mean by ‘sustainability’, this is (naturally) called as such. If ‘sustainability’ was about ‘planetary, environmental and social sustainability’, the related reporting would naturally take a much broader stakeholder perspective—to address their concerns, their risks and hold whomever is harming our planet and society accountable. However, your Consultation Paper barely discusses such implications, and even the words ‘ecology’, ‘planet’, and ‘society’ are hardly even mentioned anywhere.

With regards to setting ‘standards’ and the corresponding creation of a ‘Sustainability Standards Board’, much has been said in the aforementioned responses above. A “global set of internationally recognised sustainability reporting standards” already exists—in fact, it has existed for over 20 years under the umbrella of the Global Reporting Initiative (GRI). Whereas it is always perfectible (which standards are not, including the IFRS themselves?), they do take the imperative stakeholder perspective better than any of the other bodies today because they were originally designed and set as such. These standards need support in becoming mandatory—and getting enforced. The IFRS Foundation, via the International Accounting Standards Board, could play a determining and highly influential role by using its relationships with regulators and policymakers. However, there is no need to ‘reinvent the wheel’ and the Foundation has no role in ‘setting’ such standards. I would also like to remind you that simply replacing ‘financial’ (reporting) by ‘sustainability’ or adding the ‘non’ to the ‘financial’ does not solve the matter. Sustainability and sustainability reporting are very complex, and such desire to (over)simplify this notion and practice constitutes a major step backwards towards making the world more sustainable (or less unsustainable).

Whereas your Consultation Paper briefly mentions the importance to “build upon the established work” of the existing standard organizations specialized in these standards, the process (what, how, when, who) remains extremely vague. This question was posed during the IFRS Foundation workshop on November 17, 2020 and the response remained similarly vague and unclear.

Stakeholder
As indicated above, a one-stakeholder (i.e. investor) only perspective is fundamentally flawed, and is in fact dangerous. Such narrow mindset will likely cause human catastrophes—in fact, it already has (profit before planet and people…). I urge you to broaden your definition and perspective of ‘sustainability’, hence ‘stakeholders’ to include at the very least firm employees, customers suppliers, governments, non-governmental organizations, civil society and the physical environment/ecosystem.

Materiality
Similar to reporting issues, your Consultation Paper relies much on the notion of financial materiality and makes some future attempt to simply apply the concept to ‘sustainability’ issues. In other words, a simple risk assessment and threshold application to determine whether an ‘item’ is deemed ‘material’—but for what and for whom? From your Consultation Paper’s perspective, the answer is clearly: “for the financial statements, the investors and their risks”.

Beyond the ‘material for whom’ issue, materiality has become a key rationalization for immoral activities, which can used to conveniently hide things under the carpet. Is it material to a multinational company that it destroys ‘only’ 1000 acres of pristine habitat? What about when it employs ‘only’ 1000 child laborers or records ‘only’ 50 fatalities if they represent 1% (or say 5%) of a company’s workforce? Should they report these in their sustainability or annual report—or not…because they are deemed ‘immaterial’?

Ignoring the existing substantive body of peer-reviewed independent academic research
Annex B of your Consultation Paper is “Research considered by the Trustees” and lists:

• Investors
• Corporate Sector
• Central Banks
• Market Regulators
• Public Policy
• Global Governance
• Thought Leadership
• IFRS Foundation

The only seemingly ‘academic’ source considered is the Barker and Eccles (2018) Green Paper (within “Thought Leadership” category) which your Consultation Paper seems highly reliant upon. However, the latter is not peer-reviewed nor “neutral” as they claim (see a critique here).

Clearly, information was sought from various stakeholders—except from academics. This has led to provide inadequately supported/justified assertions in your Consultation Paper, which are highlighted in the Open Letter and further reflections. It is difficult to understand why 50 years of sustainability accounting and reporting research was ignored. In the Appendix (see bibliography¹ in the PDF version here), I provide some references of independently and rigorously peer-reviewed academic research that would have been useful and informative for drafting your Consultation Paper. Without grasping such body of knowledge on at least the basic concepts related to planetary sustainability discussed above, the IFRS Foundation would be better off ‘staying in its lane’ (i.e. financial reporting standards).

Very truly yours,