ISSB's standard on General Requirements for disclosure of sustainability related financial information is, as we know, aimed at investors interested in financial returns and so includes information that is financially material. So its not close to impact but it does seem to require information that could be presented as a sustainability related profit and loss account. That would be on the way to becoming an impact profit and loss account and on the way to providing the information we need on management's stewardship of a business' impacts and dependencies. Seems to require the information as sadly there are a number of exceptions available.
It’s worth starting by directly comparing the early paragraphs in IASB’s Conceptual Framework for Financial Reporting with ISSB's S1.
The information in Paragraph 1.4 is effectively provided by the balance sheet, the profit and loss account and the cashflow statement but there is no equivalent in ISSB S1. This would imply that there is no requirement for information on, for example, the how efficiently and effectively management have discharged their responsibilities in relation to sustainability related financial disclosures. However, there are other requirements that would provide the building blocks for an impact profit and loss account.
Paragraph 33 (c) raises the issue of trade-offs. And a profit and loss account can be seen as a summary of all the trade-offs that have been made in management’s decisions.
An entity shall disclose information that enables users of general purpose financial reports to understand the effects of sustainability-related risks and opportunities on its strategy and decision-making. Specifically, the entity shall disclose information about:
(c) trade-offs between sustainability-related risks and opportunities that the entity considered (for example, in making a decision on the location of new operations, an entity might have considered the
environmental impacts of those operations and the employment opportunities they would create in a community).
These trade-offs will occur in most decisions!
Paragraphs 34 and 35 require information on the financial effects of those trades-offs, which would be required to aggregate them and show a net profit or loss.
An entity shall disclose information that enables users of general purpose financial reports to understand:
(a) the effects of sustainability-related risks and opportunities on the entity’s financial position, financial performance and cash flows for the reporting period (current financial effects); and
(b) the anticipated effects of sustainability-related risks and opportunities on the entity’s financial position, financial performance and cash flows over the short, medium and long term, taking into consideration how sustainability-related risks and opportunities are included in the entity’s financial planning (anticipated financial effects)
Specifically, an entity shall disclose quantitative and qualitative information about:
(a) how sustainability-related risks and opportunities have affected its financial position, financial performance and cash flows for the reporting period;
(b)….
(c) how the entity expects its financial position to change over the short, medium and long term, given its strategy to manage sustainability related risks and opportunities…..,
Leaving aside the problem that these financial effects are the effects on future cashflows and not on the well-being of those experiencing the impacts, this has the potential for a sustainability related profit and loss account to sit alongside the profit and loss account, only not being included in that account because the effects do not meet IASB definitions of assets, liabilities, income, expenditure or equity, or they do but the level of uncertainty is too high for disclosure under IASB standards.
Sadly there are though a couple of get out of jail free cards.
Paragraph 38 states:
An entity need not provide quantitative information about the current or anticipated financial effects of a sustainability-related risk or opportunity if the entity determines that:
(a) those effects are not separately identifiable; or
(b) the level of measurement uncertainty involved in estimating those effects is so high that the resulting quantitative information would not be useful (see paragraphs 77–82).
This means that the entity is determining useful information and the auditor is going to have to consider whether this determination of separability and the level of measurement uncertainty are acceptable.
And then paragraph 39 states:
In addition, an entity need not provide quantitative information about the anticipated financial effects of a sustainability-related risk or opportunity if the entity does not have the skills, capabilities or resources to provide that quantitative information.
This is more worrying given that it is the responsibility of the directors to provide this useful information and therefore, presumably, ensure that the entity has these skills and capabilities. Imagine the directors deciding they did not have the resources to employ an accountant and so deciding not to produce financial accounts……
In any case this seems to clash with paragraph 27 (a) (ii), at least in so far as the entity should have a plan for developing those skills and capabilities.
To achieve this objective, an entity shall disclose information about: (a) the governance body(s) (which can include a board, committee or equivalent body charged with governance) or individual(s) responsible for oversight of sustainability-related risks and opportunities. Specifically, the entity shall identify that body(s) or individual(s) and disclose information about:
(i) how responsibilities for sustainability-related risks and opportunities are reflected in the terms of reference, mandates, role descriptions and other related policies applicable to that body(s) or individual(s);
(ii) how the body(s) or individual(s) determines whether appropriate skills and competencies are available or will be developed to oversee strategies designed to respond to sustainability-related risks and opportunities;
Paragraph 40 has another exception:
the combined financial effects of that sustainability-related risk or opportunity with other sustainability-related risks or opportunities and other factors unless the entity determines that quantitative information about the combined financial effects would not be useful.
Which begs the question of who decides if this would be useful. Given a profit and loss account is useful to investors, it would seem that the quantitative information about combined financial effects would also be useful?
The opportunity to exclude information is set up early in paragraph 6.
Sustainability-related risks and opportunities that could not reasonably be expected to affect an entity’s prospects are outside the scope of this Standard.
And expanded in paragraph 11.
A complete set of sustainability-related financial disclosures shall present fairly all sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s prospects.
But what is reasonable. Surely it cannot be reasonable to make investment decisions that have negative impacts on the well-being of others, whether or not they have no financial consequences for the investor. Especially as those immaterial negative effects could be experienced by the investor. This goes to the heart of the problem. Financial materiality alone is not reasonable.
Nonetheless a board of directors that is committed to meeting the requirements of this standard could produce a sustainability related profit and loss account (for items that do not meet the requirements for disclosure in the financial statements).
I wonder which company will be first?
Better of course would be to follow the same logic but for the impacts on well-being and create an impact profit and loss account to sit alongside the profit and loss account – setting us up for a fully integrated profit and loss account. One where profit is calculated after taking account of the consequences of a business to people’s well-being – of which only one is the financial returns.
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