Coming global accounting rules must heed practical realities
ONE of the most important developments in sustainability could arrive by year’s end with the first set of sustainability- and climate-related standards under the International Financial Reporting Standards (IFRS).
The standards, which are currently being written by the International Sustainability Standards Board (ISSB), are expected to set a global baseline that will hopefully bring about much-needed convergence in the way that sustainability-related factors are reported.
But feedback by leading Singapore entities to drafts of the coming standards show that ISSB must pay better heed to practical realities if it is to meet those lofty expectations.
One of those practical concerns lies with the ability of private companies, especially small and medium enterprises (SMEs), to meet the disclosure standards given their resources and the general lack of data for private organisations. These anxieties do not just affect the private companies themselves, but also their customers who will need to report on the impact of their suppliers.
The Institute of Singapore Chartered Accountants (ISCA), for instance, wrote in its response: “Through our outreach, we hear views that the requirements in the EDs (exposure drafts) are being set too high as a baseline, for example the requirements to disclose information about the effects of significant sustainability risks and opportunities on its value chain, particularly considering the gap in today’s practices.”
Another concern lies with divergence between ISSB’s standards and those by the European Financial Reporting Advisory Group (EFRAG) and the US Securities and Exchange Commission (SEC), especially when it comes to the reporting of greenhouse gas emissions.
The challenge for ISSB is not simply to come up with a set of principles that are robust enough to engender consistency and to provide meaningful information. Businesses and organisations from small to large must also have reasonable expectations of meeting those standards, otherwise large segments of the global economy will be excluded.
Some criticisms are more valid than others. While there is benefit to bringing IFRS, EFRAG and the SEC closer together, ISSB should not be too distracted by pleadings for IFRS to be more interoperable with the swathe of existing international standards currently in use. That is because the different prevailing standards are each written with slightly different objectives and priorities in mind, and not all of these are aligned with what is ideal for accounting and auditing.
That is after all the end-goal: To come up with a set of standards that can facilitate consistent and rigorous assurance of sustainability and climate disclosures to give stakeholders enough confidence in disclosures to make sound decisions.
ISSB should resist the temptation to water down the standards too much to overly accommodate unpreparedness, instead considering what stakeholders require to achieve sustainability and climate objectives. Inclusion is also not the sole domain of ISSB and IFRS; if SMEs lack the resources to report what banks, investors and customers need, then perhaps governments need to step in to provide them with the tools to do so.
To strike the balance between sustainability objectives and feasibility, allowing for a phased approach, as the Monetary Authority of Singapore urged, may be the way to go. Providing a bridge for those less able to comply at the start improves inclusivity while retaining aspiration, but care must also be taken to ensure that the transition is sufficiently ambitious given the urgency of the climate crisis.
