Let’s return to the Consultation Paper recently issued by the Trustees of the IFRS Foundation “to assess demand for global sustainability standards and, if demand is strong, assess whether and to what extent the Foundation might contribute to the development of such standards.”

One of the main options outlined in the paper was for the Foundation to establish a new sustainability standards board. As the accompanying news release summed it up, the new board “could operate alongside the International Accounting Standards Board under the same three-tier governance structure, build on existing developments and collaborate with other bodies and initiatives in sustainability, focusing initially on climate-related matters.”

I previously noted an open letter to the IFRS Foundation from a group of accounting professors and editors of accounting journals. The letter asserted that the Foundation’s proposal is inconsistent with the large body of research already conducted in the area, and that the proposals “will exacerbate the lack of corporate and investor responsiveness to sustainable development  issues and accountability thereon.” In a related interview, Carol Adams, one of the letter’s signatories, called the proposal not “informed by research into what drives corporate change aligned with sustainable development.” She went on: “There are various myths that seem to be perpetuated to support a goal to make things simpler for companies and investors. Yet sustainable development issues are complex and must be considered in decision making.”

One of Adams’ main objections was to the proposed definition of materiality. The consultation paper addressed this as follows:

• Given the IFRS Foundation’s current mandate and approach, some stakeholders have indicated that if the Foundation were to create an SSB it should focus on producing information about the effects of relevant events (for example, climate change) on the reporting entity, as this would support the decisions of investors and other market participants (the prime audience for financial reporting).

• On the other hand, some stakeholders are interested in developing standards referring to the principle of ‘double materiality’, under which the impact of the reporting entity on the wider environment would also be reported (see, for example, the EU guidelines on non-financial reporting). In this case, the disclosures are typically about issues that are material to multiple stakeholders’ understanding of a company’s effect on its environment…

The paper concluded: “For the SSB to commence with a double-materiality approach would substantially increase the complexity of the task and could potentially impact or delay the adoption of the standards. Therefore, a gradualist approach is recommended. If established, the SSB would initially focus its efforts on the sustainability information most relevant to investors and other market participants. Such information would more closely connect with the current focus of the IASB.”

In a further submission, Adams disagreed with this approach, saying: “Views on what is ultimately financially material for investors varies widely. Organizations cannot continue to create value for themselves, their shareholders or society more widely unless sustainable development issues are addressed. Your proposed approach increases complexity, rather than reducing it and a later switch would require revision of earlier standards.” She suggested a better starting point might lie in the following, as contained in the fundamental concepts underlying a set of recommendations for Sustainable Development Goals Disclosure, in which she was closely involved:

• Material sustainable development information is any information that is reasonably capable of making a difference to the conclusions drawn by:
• stakeholders concerning the positive and negative impacts of the organization on global achievement of the SDGs, and;
• providers of finance concerning the ability of the organization to create long term value for the organization and society.

It’s beyond my incomplete knowledge of the area to opine on what practical difference this might make (perhaps at this very early stage it’s inherently unknowable). Based on quickly scanning the comment letters, some other highly-invested respondents – such as the Climate Disclosure Standards Board – were content with the proposed approach. The CDSB did add however:

• We believe it is important, though, for a future SSB to fully appreciate the dynamic nature of materiality for corporate sustainability issues. Fast moving developments in science and technology, policy and regulation, and social and customer movements mean that the material sustainability issues of today for a particular company are likely to be different in a number of years’ time in terms of composition and operational, strategic or financial impact. The appreciation of this dynamism and mutability could be expressed in the board composition and approach to standard development, for instance.

On the other hand, Commerzbank, which one might have superficially expected to emphasize the finance-provider perspective, disagreed with the proposal:

• The idea of double materiality is at the core of the currently applicable and developing sustainability standards and recommendations, especially at the European level, but also of established international standards such as GRI. The SSB should therefore subscribe to the concept of double materiality in order to represent a useful addition to the existing initiatives and thus added value for users.

We’ll look at the comment letters again another time…

The opinions expressed are solely those of the author