Speech: Sustainability reporting and its relevance to the IFRS Foundation

Date: 5 May 2020

Where: Virtual presentation

IFRS Foundation Trustee Teresa Ko provided the following prepared remarks at the inaugural meeting of the Green and Sustainable Finance Cross-Agency Steering Group earlier in May. The group was established by the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) to coordinate the management of climate and environmental risks to the financial sector in Hong Kong.

In her remarks, she outlines possible future roles the IFRS Foundation could play in supporting progress towards the development of high-quality, internationally recognised standards for sustainability reporting.

Thank you Ashley Alder and Eddie Yue, Co-Chairs of the Steering Group, for inviting me to join today’s WebEx meeting.

I am going to speak on how the IFRS Foundation came about, what they have been doing and why I think there is a compelling case for the IFRS Foundation to play a role in helping to develop a set of globally comparable international standards in sustainable reporting, starting perhaps with climate-related risk disclosure.

I should add at the outset that I am speaking today as a Trustee in my personal capacity and not on behalf of the IFRS Foundation. All views and opinions expressed are my own.

So how did the IFRS Foundation come about? I have to take you back a bit to the global economic boom and the birth of multinational corporations following the Second World War.

At that time, whilst there was an increase in cross-border capital flow, most countries maintained their own national [financial] reporting requirements, and these were of differing quality—resulting in increased cost, risk and complexity for investors investing internationally.

In 1973, accounting bodies from ten countries (Australia, Canada, France, Germany, Japan, Mexico, Netherlands, United Kingdom/Ireland and the United States) joined together to form the International Accounting Standards Committee (IASC) and agreed to adopt International Accounting Standards (IAS) for cross-border listings.

1993 was the turning point when the chairman of the IASC urged the International Organization of Securities Commissions (IOSCO) to accept International Accounting Standards in multinational securities offerings and foreign listings. This eventually happened in 2000, when the IASC restructured itself into a full-time International Accounting Standards Board (IASB) overseen by independent trustees and the IFRS Foundation was formed.

Paul Volcker was the first Chair of the Trustees and Sir David Tweedie was Chair of the IASB. Twenty years on, the IFRS Foundation has transformed the global financial reporting landscape.

It remains a not-for-profit organisation focused on continuing to develop a single set of high-quality, understandable, enforceable and globally accepted accounting standards—IFRS Standards—and it continues to focus on their adoption and consistent application.

Headquartered in Canary Wharf, London, with an Asia-Oceania office in Tokyo and a staff of 150 across 39 nationalities, I think for an organisation of this size, it is as international as you can ever get.

Any accountant amongst you will know that in the past 10 years, the IFRS Foundation has enhanced the quality of IFRS Standards by introducing major updates to the accounting for financial instruments, revenue recognition, leasing and insurance contracts.

To date, 144 jurisdictions now require the use of IFRS Standards for all or most publicly listed companies, whilst a further 12 jurisdictions permit its use.

Even in the US, differences between IFRS and US GAAP have been significantly reduced. More than 500 international companies with dual listings in the US report using IFRS Standards.

China's national standards are substantially converged with IFRS Standards. Chinese companies representing more than 30 per cent of the total market capitalisation of the domestic market produce IFRS-compliant financial statements as a result of their dual listings in Hong Kong and other international markets.

The IFRS Foundation has a three-tier structure with the IASB as the independent standard-setting body. The Trustees of the Foundation are responsible for the strategic direction, governance and oversight of the IASB and the Trustees themselves are in turn accountable to the Monitoring Board, which comprises representatives of securities regulators and public authorities around the world.

With that history, I very much feel that sustainability reporting today is in a similar position to how financial reporting was before the IFRS Foundation and the IASB were formed.

I say this because on the supply side, we have seen a proliferation of sustainable reporting standards and frameworks which are at various stages of development or maturity.

I’m not going to go into the specifics, but quoting the Financial Times, there are at least 230 corporate sustainability standards initiatives across more than 80 sectors. The Financial Times is not often wrong, but we have heard that there are actually more than 650 different metrics available for companies looking to undertake sustainability reporting, not to mention initiatives from multiple governments and international organisations promoting just climate change reporting.

No global standard has yet emerged, which is what we all need. It is clear to see that the diversity and voluntary nature of these disclosure frameworks create challenges and present risks and scope for cherry picking and greenwashing.

On the demand side, investor groups, business leaders, regulators, central bankers and policymakers have emphasised the importance of a high-quality, globally comparable framework for ESG/sustainability reporting—with a growing consensus for consolidation across the sustainability reporting landscape.

Investors, in particular, want comparable and auditable information rather than having to wade through a sea of underdeveloped data and analytics on investable assets usually without sufficient internal expertise or resource to help them. This can result in the unintended outcome of discouraging investments in those areas.

Although IFRS Standards do not contain specific requirements on sustainability reporting, companies applying IFRS Standards should consider whether investors could expect that emerging risks including climate-related risks could affect the amounts and disclosure reported in the financial statements. Potential implications arising from climate-related and other emerging risks may also include asset impairment including goodwill, changes in the useful life of assets and changes in the fair valuation of assets.

I’m glad to say that the IASB has not stood still in the face of rapid developments in the realm of sustainable reporting. Back in November 2017, it decided to update their Management Commentary (Practice Statement) which is their guidance to companies in these areas.

My take on this exercise is in part to acknowledge that because financial statements are primarily backward looking, they cannot fully explain the long-term strategy of a company—so management commentary is there to fill the gap.

The idea is to use management commentary to explain how these long-term challenges might affect future cash flows which are not (yet) captured by financial statements.

The IASB has completed an initial round of consultations with its consultative bodies and is currently discussing what guidance to provide in the revised Practice Statement. It expects to publish an exposure draft in the second half of 2020.

At the Trustees level, some of us do not believe we are going far enough to embrace changes we see now and ahead of us. Encouraged by informal requests from key institutions and stakeholders, the Trustees themselves have been considering how the Foundation can play a role in this urgent development. This timing happens to coincide with the review of the strategy and constitution of the IFRS Foundation, which takes place every five years and will begin this year. We also want to focus on climate-related risk first as that is the most urgent and it is also consistent with our feedback.

A small working group of Trustees (of which I am a member) has been established to explore what role the IFRS Foundation can play.

The achievements to date of the IFRS Foundation and the IFRS Standards have been attributed to many aspects. These include the governance structure of our Foundation, our public accountability, our public interest focus, our fair and full consultative process, the independence of our standard-setting body, our rigorous, transparent and participatory due process, assurance standards applying to the information published and a robust process for selecting topics for new standard setting.

Twenty years of global standard-setting experience under the scrutiny of so many stakeholders has created a deep pool of experience and invaluable resource that I believe should be used in our collective effort to tackle the ongoing challenges of sustainable reporting.

So I do believe that a compelling case can be made for the IFRS Foundation to help with the consolidation and the settling of globally comparable, high-quality and auditable standards of disclosure in sustainability reporting, starting with climate-related risks.

The IFRS Foundation will also have the added advantage of their connectivity with financial reporting under IFRS Standards, as it would not be right to emphasise one form of reporting at the expense of the other—so the ongoing development of IFRS Standards must continue to be supported and the financial impact of whatever global standards of sustainable reporting particularly on climate-related risk that we can arrive at must also be considered and (if appropriate) reflected in the financial statements.

For what it is worth, my own view is that the two sets of reporting should not exist each in its own vacuum. Both sets of reporting should be encouraged to be developed in parallel but with a high degree of correlation with each other, so that investors and the world at large can benefit from the resulting comparable, auditable and decision-useful figures, information and data.

Thank you very much.