July 27, 2022
International Sustainability Standards Board, IFRS Foundation
Professor Charles H. Cho
Dr. Blerita Korca
Professor Joanna Krasodomska
Professor Ian Thomson
Professor Gunnar Rimmel
Re: Exposure Drafts IFRS® Sustainability Disclosure Standards IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures
Dear members of the International Sustainability Standards Board,
We are a group of Professors of Accounting who have been researching in the field of sustainability accounting and reporting for many years – some of us for decades.
Considering our research evidence-based and practice-based expertise in the field of sustainability accounting and reporting, we would like to offer several suggestions for the International Sustainability Standards Board (ISSB) to take into account when publishing the new IFRS Sustainability Disclosure Standards. We strongly believe that there are several critical aspects which need to be rethought, reconsidered and revised in order to provide disclosure standards that facilitate entities’ disclosure and address stakeholders’ needs. In this regard, some major issues are identified below.
The definition of materiality in the exposure drafts has two major drawbacks as follows:
We note that 31 of the 39 submissions from academics to the IFRS Foundation Trustees Consultation Paper on Sustainability Reporting (IFRS Foundation, 2020) did not agree with a financial materiality approach (Adams and Mueller, forthcoming). This is reinforced by the recent special issue of Accounting in Europe on the “Future of Corporate Reporting” and its editorial (Cho et al., 2022). To contribute to sustainable development, companies need to understand, manage and report their climate-related impacts transparently, trustworthy, and objectively. Without identification of material impacts on climate, companies will not be able to determine climate-related risks and impacts on their financial performance. A reporting framework that does not encourage companies to provide information on their climate-related impacts is therefore damaging to sustainable development – and, ironically, to their long-term financial success (Adams et al., 2021). From a long-time perspective, most sustainability matters will also have financial implications due to, for example, reputational risks.
Therefore, we disagree with the objective established for S2, as it is not in line with the double materiality concept. Thus, the information provided as a result of its implementation would not “enable users of general purpose financial reporting to assess the effects of climate-related risks and opportunities on enterprise value.” An enterprise must first identify its material sustainability impacts. Otherwise, assessing financially relevant climate-related risks and opportunities (or relevant to the enterprise value) will be incomplete.
The literature review conducted by Adams et al. (2021) allowed identifying several benefits related to the application of double materiality, such as enhanced stakeholder engagement (Cooper and Morgan, 2013; Brown and Dillard, 2015; Puroila and Mäkelä, 2019), better investment decision making, improved financial performance (Khan et al., 2016), and more accurate analyst forecasts (Khan et al., 2016; Grewal et al., 2020; Martinez, 2016; van Heijningen, 2019). However, there are also problems and challenges when applying double materiality. Literature suggests that the materiality determination process is not adequately reported (Adams, 2004; Beske et al., 2020; Machado et al., 2021; Guix et al., 2018), and materiality assessment favors short-term financial interests (Puroila and Mäkelä, 2019). The materiality assessment process was found not to be included within the scope of sustainability assurance engagements (Borial et al., 2019), or the assurance was limited to data checking (Boiral and Heras-Saizarbitoria, 2020; Boiral et al., 2019; Farooq and De Villiers, 2019; Gürtürk and Hahn, 2016). These problems are due to the lack of experience in conducting materiality analysis and heterogeneity of materiality definitions, guidelines, and applications (Adams et al., 2021).
We support the views which welcome the movement towards embracing double materiality and encourages the ISSB to reconsider its decision to focus on financial (and single) materiality only. To be used as a global baseline, IFRS S2 should be revised to integrate double materiality. As Baumüller and Sopp (2022) conclude, while perhaps being initially attractive for investors, financial materiality would do little to meet the needs of other information users. It would likely lead to omitting important sustainability impacts from sustainability reporting. This situation would harm the planet’s sustainability and all stakeholders, including investors. Therefore, we strongly suggest that the ISSB acknowledges that an entity’s financial sustainability is interdependent with the sustainability of the planet and society (see also Open letter about the Materiality Debate).
The global baseline
There are several issues with the exposure drafts which do not allow them to serve as the global baseline. The exposure drafts are not coherent with the direction of other international frameworks and regulations on several aspects as follows:
Scope 3 disclosures
We support the disclosures on Scope 1, Scope 2, and Scope 3 and the use of the GHG Protocol for this purpose to ensure comparability and quality of the information provided.
As acknowledged by the ISSB in question 9, the disclosure of Scope 3 GHG emissions is increasing in quality and becoming more common. However, it still presents several challenges. At the same time, Scope 3 emissions, also referred to as value chain emissions, often represent the majority of an organization’s total GHG emissions (Environmental Protection Agency, 2021). Research provides evidence that Scope 3 was and is still far less reported than Scope 1 and Scope 2 (Kolk et al., 2008; Tang and Demeritt, 2019). According to Kolk (2008), lower disclosure of Scope 3 is not surprising as under the GHG Protocol, quantifying these emissions is not required. Firms that provide information tend to only report on a few activities that fall under Scope 3 emissions. The most widely reported Scope 3 emissions are from employee business travel (Kolk, 2008). Similar results were obtained 11 years later by Tang and Demeritt (2019). Companies covered by the study were found to collect some data on Scope 3 emissions, typically associated with flights and business travel, which were relatively easy to manage compared with the full life cycle analysis that might be required to trace the emissions arising up and down the supply chain. The authors concluded that since these indirect Scope 3 emissions are not linked with any costs to the company, the reason for collecting them was reputational and related to participation in voluntary reporting schemes, such as CDP’s Climate Change Program, which rates companies more favorably if this additional information is reported. Therefore, we suggest implementing a phased approach with the requirement to provide Scope 1 and Scope 2 disclosures immediately and at least some more problematic Scope 3 disclosures with a delay. However, a study of S&P 500 GHG emissions over the period 2015-2019 identified that on average scope 1 and 2 emission only represented 23% of GHG emissions already disclosed by S&P 250 firms, with over 37% of GHG disclosures already including Scope 3 emissions (Thomson et al, 2021). This suggests that ISSB recommendations will result in a rollback in corporate disclosure practise..
The use of SASB standards and TCFD recommendations
According to the SASB website 1,411 (42%) of SASB reporting comes from the USA. Only 374 (11.7%) were from Europe (Value Reporting Foundation, 2022). In Europe, SASB Standards are not commonly applied and there is limited understanding of them.
Appendix B, which is an integral part of the S2 is comprehensive and contains extensive and detailed disclosure requirements. The large number of metrics specified raises concerns about the potential difficulties related to S2 implementation and the cost-effectiveness of the reporting process.
On the contrary, the TCFD recommendations are a globally recognized framework for climate-related reporting. As of October 2021, in addition to the support of dozens of regulators and supervisors, Brazil, the European Union, Hong Kong, Japan, New Zealand, Singapore, Switzerland, and the United Kingdom have announced requirements for domestic organizations to report in alignment with the TCFD recommendations (FSB, 2021). However, many countries have not decided to follow this path. Therefore, problems and costs related to the implementation of S2 would be different across countries.
Prior research suggests that despite the issuance of the TCFD framework contributed to the increase in climate reporting from 2015 to 2018, its compliance with TCFD recommendations is poor, specifically concerning the core element of strategy (Bastien and Giordano-Spring, 2022). Most of the disclosures were in voluntary sustainability reports, not the financial filings recommended by the TCFD. Similarly, Demaria and Rigot’s (2020) research results highlight disparities across TCFD areas and suggest that firms are less compliant with specific crucial recommendations of TCFD. O’Dwyer and Unerman’s (2020) study identified such specific challenges regarding using TCFD reporting practices as, e.g., understanding novel climate-related scenario planning, integrating climate risks into corporate-level risk management, determining the climate-related materiality, and aligning TCFD reporting with other corporate reporting frameworks.
We understand the urgency related to the implementation of the S2. However, given the above, we suggest that the ISSB considers implementing a phased approach and allowing applying some requirements earlier and some with a delay. For example, disclosures involving scenario planning or some quantitative measures, as Scope 3 mentioned above, could be provided later, and qualitative information on corporate governance, risks, and opportunities may be disclosed earlier.
Charles H. Cho, PhD, CPA
Professor of Sustainability Accounting
Erivan K. Haub Chair in Business & Sustainability
Schulich School of Business, York University, Canada
Blerita Korca, PhD
Department of Economics and Management, University of Trento, Italy
Joanna Krasodomska, PhD
Department of Financial Accounting, Cracow University of Economics, Poland
Gunnar Rimmel, PhD
Chair in Accounting & Corporate Reporting
Director of The Henley Centre of Accounting Research & Practice (HARP)
Henley Business School, University of Reading, United Kingdom
Ian Thomson, PhD, CMA
Professor of Accounting & Sustainability
Director, Lloyds Banking Group Centre for Responsible Business
Birmingham Business School, University of Birmingham, United Kingdom
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