THE ACCOUNTANTS ARE TAKING OVER
Alex Wilson, senior consultant at Design Bridge and Partners, explores the crossover between finance and sustainability reporting.
For many this heading may be met with some reticence. What do accountants have to do with sustainability?
As sustainability becomes an increasingly hot topic amongst key stakeholders, we are seeing a growing correlation between sustainability and financial performance. This correlation is being mirrored in sustainability and financial reporting both in terms of rigour and data expectations.
The crossover between finance and sustainability reporting is already evident in the Taskforce for Climate Related Financial Disclosures (TCFD), an important framework designed to communicate critical climate information to investors.
Since 2022 TCFD reporting has been mandatory for many UK companies with the Financial Reporting Council (FRC) recommending that data disclosed in the TCFD statement should be “backed up by an interconnected narrative, which is consistent with the financial statements”1. This highlights the importance of sustainability teams co-operating with their financial counterparts to create a more robust sustainability narrative.
Alongside TCFD, another rapidly emerging ESG area is materiality with around three-quarters of the world’s 250 largest companies (by revenue) producing materiality assessments2.
According to the Institute for Chartered Accountants England and Wales (ICAEW) “Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general-purpose financial statements make on the basis of those financial statements”.
An understanding of materiality is an essential component of financial analysis and audit testing. Therefore, the extensive experience that accountants have in this area will be a critical asset when quantifying what is material to businesses from a sustainability perspective.
But why is materiality so important? Materiality is a core feature of incoming sustainability standards across the world. This includes standards S1 and S2 recently published by the International Sustainability Standards Board (ISSB) and due to become effective for periods beginning on or after 1 January 2024.
The ISSB uses the ICAEW’s definition of materiality, with S1 & S2 focusing on making explicit the impact of climate-related risks on the financial statements. The ISSB emphasises that the disclosures should include data and assumptions that are consistent with the related financial statements, to the extent possible, considering accounting requirements.
These requirements demonstrate the interplay between sustainability and accountancy, and the increasing importance of collaboration between the two teams.
The Corporate Sustainability Reporting Directive (CSRD) is the European regulatory body in charge of another set of standards, the European Sustainability Reporting Standards (ESRSs). The starting point for these standards is also a materiality assessment, although using a different materiality lens, and they are currently due to become EU law in January 2024.
Both the ISSB and the CSRD (excluding ESRS 2 disclosures) do not require companies to disclose information on topics assessed as non-material. Materiality assessments will therefore dictate corporate reporting strategy, highlighting the importance of getting them right by ensuring the relevant expertise is involved.
Lastly, the same rigour that is applied to auditing financial information will soon face sustainability disclosures. The CSRD requires sustainability information to be assured, whilst the ISSB encourages the assurance of such information.
Financial statements have been subject to assurance procedures, such as audits, for many decades. This means that finance teams are well-equipped to deal with this enhanced level of regulatory scrutiny.
The importance of materiality and financially quantified disclosures is only growing in the sustainability reporting sphere. This, alongside the increased scrutiny applied to sustainability disclosures, is indicative of the increasing parallels between sustainability and financial reporting. We recommend that businesses start the dialogue between sustainability and finance early, utilising this collaboration to ensure rigorous disclosure.
1 CRR Thematic Review of climate related metrics and targets
2 KPMG Survey of Sustainability Reporting 2022
