On 31st January 2022, the Climate Disclosure Standards Board (CDSB) was consolidated into the IFRS Foundation to support the work of the newly established International Sustainability Standards Board (ISSB). While this site and its resources remain relevant for preparers looking to improve sustainability disclosure until such time as the ISSB issues its IFRS Sustainability Disclosure Standards on such topics, no further work or guidance will be produced or published by CDSB. For further information please visit the IFRS website.

A Debate At The Oxford Union: Should FASB And IASB Set Standards For Nonfinancial Information?

On December 11, 2018, a debate will be held at the Oxford Union regarding the “Motion: This House believes that corporate sustainability reporting should be mandated, and standardised by FASB and IASB, for it to be most useful for investors.” It will be chaired by Lady Lynn Forester de Rothschild. In proposition are Paul Druckman, Ian Mackintosh, Sir Callum McCarthy, and Anne Simpson. In opposition are Jonathan Bailey, Bob Herz, Harvey Pitt, and Tom Quaadman. The debate is free and open to the public as space permits.

As preparation for this debate, Professor Richard Barker, head of the accounting department at the Said Business School, Oxford University, and
Dr. Bob Eccles have written a “Green Paper” titled “Should FASB and IASB be responsible for setting standards for nonfinancial information?” The Oxford English Dictionary definition of a Green Paper is “(in the U.K.) a preliminary report of government proposals published to stimulate discussion, from which statements of policy and proposals for legislative change emerge in the form of a White Paper.” In other words, this paper doesn’t take a position one way or the other. We simply lay out the arguments pro and con for these financial accounting standard setters to have the responsibility for setting standards for a company’s environmental, social, and governance (ESG)—often referred to as “nonfinancial”—performance. The alternative to this regulatory solution to achieving standards for measuring and reporting on nonfinancial information is to let market forces decide if such standards are desirable and, if so, how to develop them.

I will briefly review the pros and cons of a regulatory solution and suggest just one of many paths for a market solution, but first a bit of history to set some context. We take financial accounting and reporting requirement standards for granted. They form part of the essential plumbing of today’s capital markets. Every listed company needs to conform to some set of accounting standards which are used for mandated financial reporting. In the U.S., Generally Accepted Accounting Principles (U.S. GAAP) are set by the Financial Accounting Standards Board (FASB). Most of the rest of the world uses International Financial Reporting Standards (IFRS), or something very similar, which are set by the International Accounting Standards Board (IASB). Independent accounting firms perform audits to ensure these standards and reporting requirements are being properly met. These firms, in turn, have their work overseen by various regulatory bodies. We wouldn’t have the deep and liquid capital markets we have today without financial accounting standards and reporting requirements.

We take this plumbing infrastructure for granted. Yet it didn’t always exist. The journey to financial accounting standards and reporting requirements in the U.S. began with the formation of the Securities and Exchange Commission (SEC) following the Crash of 1929 which instigated the Great Depression of the 1930s. The SEC was formed to protect investors through corporate transparency of relevant and reliable information on their financial performance so that shareholders could make informed investment decisions. Similarly, other countries developed their own version of accounting standards, but these “Country GAAPs” have largely been replaced by IFRS.

Today investors are increasingly concerned with nonfinancial information as evidence mounts that a company’s good performance on material ESG issues contributes to good financial performance. But it is a bit of a “Wild West” when it comes to getting information on nonfinancial performance. Investors are faced with a bewildering array of data vendors providing nonfinancial information through various methodologies and NGOs attempting to develop standards for nonfinancial information (none of which have government support for any country in the world). The “Green Paper” reviews these well-meaning efforts which, in the aggregate, are creating more confusion than clarity. Data vendors often end up with very different rankings of the same company, with the social origins of these vendors being one reason for this. The Impact Management Project (IMP) is working to align many of the efforts in the NGO world.

This begs the question of whether FASB and IASB should set standards for nonfinancial information, just as they do for financial information. While investors’ views vary on whether they should or not, there is a strong consensus that having such standards would be useful. Investors would then be able to compare companies’ nonfinancial performance just as they do financial performance. Clearly this would lead to better investment decisions.

A good case can be made that FASB and IASB expand their standard-setting mandate to nonfinancial information, including the following reasons:

  • An infrastructure and staff of highly skilled professionals with a long track of expertise in standard setting, including the process of getting input from the investment and corporate community for setting standards
  • Well-established governance structures overseeing their work, buttressed with strong regulatory and financial support
  • A high level of credibility in the investment and corporate communities due to their focus on material information important for value creation
  • Would be able to integrate nonfinancial information into mainstream corporate reporting

Yet a strong case can be made that this is not a good idea, including the following reasons:

  • The necessary preconditions for setting standards for nonfinancial information may not exist, such as a lack of consensus on what should be reported and difficulties in developing quantitative metrics
  • Expertise in setting financial accounting standards may not translate into nonfinancial standards since the latter cover a wide range of environmental, social, and governance topics whose importance varies across industries
  • It is not clear that FASB and IASB could extend their mandate to nonfinancial information
  • It is not clear they could get the required regulatory and political support if they wanted to

The alternative to a regulatory solution is to look to market forces to get a convergence on standards. A market solution didn’t lead to financial accounting standards but that doesn’t mean it couldn’t in the case of nonfinancial information given how much more developed and sophisticated the capital markets are today.

One path this could take is that the NGOs working in this domain, such as Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), work together to establish common standards. This could happen by recognizing that users’ information needs differ (e.g., shareholders vs. other stakeholders) and that some ESG metrics are relevant to every company (such as human capital development) whereas others vary by industry (such as access to medicine for a pharmaceutical company vs. risk management in a bank). Through investor pressure, companies would be compelled to report according to these standards, even if a regulator didn’t say they had to. The data vendors could then efficiently provide this information being reported by companies and shift their business models to selling data analytics rather than simply information, which is already happening.

I have yet to form an opinion on how best to develop standards for nonfinancial information, although I believe this will eventually be necessary. As sustainable investing goes mainstream at an accelerating pace, better quality plumbing for delivering relevant and reliable nonfinancial information will become increasingly important. The debate at the Oxford Union will be a key step to constructing the best path for developing standards for nonfinancial information. Professor Barker and I will present our own view in a “White Paper” which will be published next year.

For those of you interested in this topic but who cannot attend the debate, it will be live-streamed and then made available online. I will provide further information on this closer to the date of the debate.

Dr. Bob Eccles is a Visiting Professor of Management Practice at Saïd Business School, University of Oxford, and author of several books on integrated reporting, sustainability and the role of business in society. His research is focused on sustainability from both a company and investor perspective. He is also involved in a variety of initiatives to embed environmental, social, and governance (ESG) issues in real world decision making. One of these is the Sustainability Accounting Standards Board (SASB), of which he was the founding chairman. In 2018, he was selected by Barron's as one of the top 20 influencers on ESG investing.

The focus of his work is leveraging the capital markets for sustainable development through the integration of ESG factors into the strategic decisions of companies and investors' investment decisions.

CDSB's Technical Director Nadine Robinson ( ) will also attend the debate