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People and Planet in the Accounts: non-financial disclosures – why the notes matter

Jeremy Nicholls, Capitals Coalition ambassador and NED, explains why financial statement notes are an important stepping stone in recognising environmental and social data.

First published by ICAEW.

We need full integration of financial, social and environmental information in financial statements if we are going to shift investment decisions towards business models that generate financial returns and positive impacts. However, that could need more radical change to make it happen.

Jeremy Nicholls, Capitals Coalition ambassador and non-executive director for several companies, believes a conversation needs to start now, which is why accountants and auditors need to include this data somewhere – and the notes is a great place to start.

“We need to say: what would actually be possible with the existing accounting and auditing standards?” says Nicholls. “We need to be open and upfront. I think if we can win that argument, even if it's just in the notes, then we suddenly open up a whole new range of conversations.”

He explains that it would be easier to make the argument for including relevant environmental and social information in the notes. “I think of it as the best way of exploring the boundary between financial and non-financial information,” says Nicholls.

The IFRS is consulting on sustainability reporting at the moment. Part of that discussion asks questions about users – current and potential investors – and what they want from company information. This is potentially a very broad audience, including ordinary pension holders, says Nicholls, and begs some interesting questions about information needs.

“Now, they can assume that the information needs are to make economic decisions, to provide resources to an entity. To make that decision, you need information on the ability of the entity to generate net cash inflows and consider the stewardship of management. But does this still represent the information needs of the majority of users? I would argue that it doesn't.”

Nicholls believes the majority of users want to know more than that. They want to know the wider impacts of the organisation too, partly because these inform the risk of those cashflows and partly because most investors, not those who manage investments on behalf of others, want to know this before they are willing to invest.

But sustainability reports don’t go far enough. Financial accounts help assess management performance, representing the decisions managers have made. “In a lot of sustainability reporting, we're not getting a test of management's performance.”

If sustainability information can meet the requirements for disclosure in the notes then it will be linked to performance but eventually, this information will have to be integrated into the profit and loss, says Nicholls.

“I think we need to raise the issue, make sure these things are considered either because they are part of assessing the risks or because investors want to know before they decide to invest. It may seem hard but there are plenty of very bright people who can go away and do it – once they've given the kind of go-ahead.”

In a way, it all comes down to which audit partner will take the bold step in deciding this is relevant and insisting this information is included in the accounts. “It won’t be a firm,” predicts Nicholls, “it will be an audit partner who makes that move. It's not that they can't – if you made them aware that perhaps they should, and could, buy into it, then it’s possible. It’s a big, but achievable step.”

Which brings us back to the idea of putting sustainability information in the notes. It’s about nudging people towards a mindset change. “Once we make the first step, the rest will be easy,” concludes Nicholls.

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