As we addressed here, the International Sustainability Standards Board has issued its first two exposure drafts, General Sustainability-related Disclosures and Climate-related Disclosures, both open for comment until July 29, 2022.

One of the proposals’ key structuring concepts is that of “enterprise value,” as evidenced for instance in the following passages:

• A reporting entity shall disclose material information about all of the significant sustainability-related risks and opportunities to which it is exposed. The assessment of materiality shall be made in the context of the information necessary for users of general purpose financial reporting to assess enterprise value…
• … an entity is required to disclose sustainability-related financial information in order to provide the users of that information with a sufficient basis to assess the implications of sustainability-related risks and opportunities on the entity’s enterprise value.
• Enterprise value reflects expectations of the amount, timing and certainty of future cash flows over the short, medium and long term and the value of those cash flows in the light of the entity’s risk profile, and its access to finance and cost of capital. Information that is essential for assessing the enterprise value of an entity includes information that is provided by the entity in its financial statements and sustainability-related financial information.

The basis for conclusions explains:

• The emphasis on sustainability-related risks and opportunities that inform an assessment of enterprise value distinguishes sustainability-related financial information from broader, multi-stakeholder reporting efforts focused on an entity’s contribution to sustainable development. This separate emphasis, in turn, can be helpful:
  • in allaying concerns that the Foundation has broadened its scope beyond investor-focused disclosure to cover the broadest possible range of sustainability issues; and
  • in confirming that IFRS Sustainability Disclosure Standards are conceptually and practically complementary to—but not a replacement for—reporting on an entity’s significant impacts on people, the environment and the economy.

It’s not self-evident to all respondents that such a focus is for the greater good. The respondent Peter Wells expressed a belief that:

• the emphasis given to the determination of ‘enterprise value’ in the objective of sustainability reporting…is a legacy of strategies to legitimize sustainability reporting and identifying its significance (which we are beyond). Problematically it identifies one specific use of sustainability information, and scant consideration is given to whether this is appropriate for users of information more generally, or how it might be used more generally (i.e., too restrictive).
• … it suggests the adoption of a ‘stakeholder view’ of the firm, where the purpose of reporting is less well developed…This contrasts with the Conceptual Framework for Financial Reporting which arguably adopts (a) ‘shareholder view’ and identifies the provision of information for decision making as central to the objective of financial reporting. Critically, this provides a broad understanding of the objective of financial reporting, and this could overflow into sustainability reporting. Most problematically, if financial and sustainability reports are prepared on different bases it makes it difficult to envisage how there can be articulation / connectivity.

But whereas Wells interprets the focus on ‘enterprise value’ as a symptom of an ill-defined “stakeholder view,” other commenters object on more or less diametrically opposing grounds. This is from Better Next:

• Currently, the draft says assessing enterprise value is the main use of companies’ disclosures. Investors’ myopic focus on enterprise value for decades is the reason that climate effects have been disregarded by corporate leaders for so long. Therefore, the new standard must more directly shift from the old way of thinking. It must add a modern approach requiring investors to also consider stakeholder treatment in their decisions. Treatment of stakeholders influences enterprise value over the long-term. Financial markets are woefully ill-equipped to assess and reward long-term value in comparison to how they reward short-term value.
• Therefore, please edit the exposure draft throughout to couple stakeholder treatment with enterprise value. The final version will not only be monumental in its inclusion of climate related risks but also in pushing investors to make their decisions with contemporary priorities.
• ,.. please make your final decisions not beholden to the groups of people who are powerful now, but instead in preparation for the groups of people who should be powerful in the future.

However, as Better Next conceives it, this only consists of editing each mention of “enterprise value” to read “enterprise value and stakeholder treatment” – it provides no further thoughts on what that should practically entail for preparers. No surprise then that another commentator, Carol Adams, opined that the proposals “will not lead to harmonization…green washing will flourish and disclosures will be challenging to audit. Green washing will be facilitated because reporters lack knowledge about how risks might influence enterprise value and because reporting on impact is not the focus of the ISSB…” Adams believes the proposals are conceptually flawed and muddled and advocates using the GRI Standards of the Global Reporting Initiative as an alternative starting point.

Well, more to come…

The opinions expressed are solely those of the author