From working conditions and human rights, environmental pollution and social well-being, commercial activities have far-reaching consequences, which must be measured – but who will set the standards?

Sustainability reporting has grown exponentially in recent years, Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB) has told an accounting event in Brussels. And most of the volume-expansion of annual reports is due to extended environmental, social and governance (ESG) reporting.

Hoogervorst covered several issues in his speech in Brussels, including the future of corporate reporting and the challenges companies face. He also highlighted the following trends in financial reporting:

• the trend towards a widening gap between book values and market values of companies;
• companies are providing more non-financial information, mainly on environmental, social and governance (ESG) issues;
• financial reports are not only aimed at investors - companies are seeking a wider audience;
• there is increasing availability of digital data and the emergence of Artificial Intelligence to mine these big heaps of data;
• the increasing availability of digital data also brings with it a greater need for comparability, standardisation and quality control – so financial statements will remain important.

ESG and sustainability reporting

One important point in his speech was on sustainability – or ESG – reporting. He told the audience that ESG/sustainability reporting requirements aim to do the following:

• to show the value created (or destroyed) by a company in relation to collective goods such as the environment or social well-being;
• encourage corporations to act responsibly and to take broader public goods into account;
• it can also be linked to public policy: for an emission rights trading scheme, for example, reliable carbon reporting can be essential.

The industry for ESG reporting still requires harmonisation and standards – but Hoogervorst said that the IASB is not the right organisation to take on this challenge, saying: “ESG reporting to wider stakeholder groups requires expertise that we [the IASB] simply do not have”. He argues that public authorities are best placed to pursue a harmonisation agenda for ESG reporting, since many of the requirements are closely intertwined with public policy goals.

Call for taxation on damaging economic activities

However, Hoogervorst also makes another important point: that ESG reporting is often more related to PR and is not as effective as legislation or regulation in curbing harmful environmental or social effects and consequences of commercial, industrial and business activities. He gives the following example:

“In their sustainability reports, soft drinks producers are very keen to show how they try to entice their customers to reduce their sugar intake and pursue a more active lifestyle. Yet this does not stop the same industry from lobbying actively against the imposition of a sugar tax, which would likely be much more effective.”

He concludes: “To address the big environmental questions of our time it is urgent that the damaging external effects of economic activities are fully translated into their price through taxation. Proper pricing will reduce such activities and encourage development of cleaner alternatives.”

For the full text of the speech, see the IASB website.