IFRS, climate change, and enlightened self-interest

I’ve written in the past about a June 2018 Hans Hoogervorst speech, IFRS standards as enlightened self-interest

This was the key passage:

  • Given the voluntary nature of IFRS adoption, we like to believe that the adherence to our Standards is a reflection of the quality and inclusiveness of our work. More importantly, most of our stakeholders resist the temptation of modifying our Standards as a consequence of what the Dutch call ‘welbegrepen eigenbelang’. In English this means literally ‘well-understood self-interest’, but it could also be translated as ‘enlightened self-interest’.
  • Acting in ‘enlightened self-interest’ means foregoing a smaller self-interest to achieve a bigger self-interest. Even when our stakeholders may not agree with certain aspects of our Standards, they know it is not in their ‘enlightened self-interest’ to modify them. They know this could set in motion a process of gradual balkanisation of the world of IFRS Standards, undoing the benefits of a single set of global standards.

The speech came back into my mind because Thomas Friedman used that same phrase in a recent New York Times column, referring to a new book by retired diplomat William J. Burns:

  • Burns’s argument is that what made American (and E.U.) leadership effective (in the past) was a spirit of “enlightened self-interest’’ — meaning that sometimes we assumed greater economic or leadership burdens to build a coalition or buttress allies because in the long run, as the world’s biggest economy, we would benefit most from the stability and the commerce those would generate. It advanced both our values and our interests.
  • Trump has gotten rid of most of the “enlightened’’ part of “enlightened self-interest’’ and focuses only on the “self-interest,’’ notes Burns. Trump’s approach, he adds, is more “transactional muscular unilateralism.’’ But its viability is yet to be proven anywhere.

In my earlier column, I said the term seemed to me a malleably empty phrase, like “seeing the big picture,” or “doing the right thing.” But Friedman’s column caused me to reconsider this a bit. Writing recently on another Hoogervorst speech, I noted that Trump “is a persistent enemy of (among much else) rationality, reflection and enlightenment – that is, of just about everything that IFRS might be hoped to represent.” The topic of that speech was sustainability reporting, Hoogervorst’s core point being that “the IASB is (not) equipped to enter the field of sustainability reporting directly.” I didn’t take issue with that specific conclusion at the time. But there’s a counter-argument, indicated by Friedman’s concluding paragraphs:

  • We have never had a greater need for the E.U. and the U.S. to be led by people motivated by enlightened self-interest, who appreciate that virtually every problem destabilizing the world in this plastic moment is global in nature and can be confronted only with a coalition that is global. But instead, we are saddled with leaders who are much more adept at breaking things than making things — at going for broke rather than making the best of the bad.
  • It just feels like our luck is running out.

In the field of corporate reporting, there’s no global coalition comparable to that created by common interest in IFRS. Hoogervorst commented: “Setting sustainability reporting standards requires expertise that we simply do not have. Moreover, there are already more than enough standard-setters active in this field.” But the latter point (he cites more than 230 existing initiatives) might be better taken as a reason for a big unifying player to enter the game, and as for the expertise, well, that could no doubt be acquired. Of course, I realize that if the IASB veered too far off its traditional path, questions of legitimacy might arise, perhaps in turn leading to funding issues and who knows what else. But, arguably, it’s worth taking on those problems, because put simply, climate change is more important than anything else that the IASB is likely to work on for the foreseeable future. While addressing the issue may or may not be in the IASB’s narrow self-interest, it’s surely in its enlightened self-interest, because expressed in the above terms, users of IFRS-compliant financial reporting, those relying on it to allocate their resources rationally over a long-term time horizon, would benefit from the greater overall transparency that would flow from more reliable and consistent reporting on this key determinant of what a long-term time horizon looks like, if it looks like anything at all.

I suppose this column is something of a thought experiment: I don’t think it’s likely that the IASB will jump into this area any time soon, just as I don’t think it’s likely that our leaders will any time soon take action that’s anywhere near proportional to the existential threat it represents. But while the concept of enlightened self-interest may be alien to Trump and his wretched cohorts, we at least know it carries some weight at the IASB. Maybe it needs to carry even more.

The opinions expressed are solely those of the author

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