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Some reflections on the Consultation Paper on Sustainability Reporting published by the IFRS Foundation

by Matias Laine and Giovanna Michelon

On October 15th, we were among the signatories of an open letter to the Chair of the IFRS Foundation Trustees, written and prepared under the leadership of Professor Carol Adams, in reaction to the Consultation Paper on Sustainability Reporting.
The letter has attracted some attention, some criticism, some applause. We hope the letter will also create some reflection about what is at stake. We are not going to reiterate here the points we cover in the letter. Here, we write as individual scholars who have worked on social and environmental accounting since when it was considered marginal, or surely not particularly core, to the mainstream research community.
We are seeing more and more scholars interested in sustainability accounting and reporting, or ESG – as it is now fashionably called. This is brilliant! Vast scientific effort is needed to help societies navigate climate emergency, the sixth mass extinction, and general transgressing of planetary boundaries. We need accounting scholars to learn the fundamentals of sustainability, to embed those principles in their research, and incorporate sustainability within the accounting curricula. 
Luckily, there is a strong basis of research to build those efforts on. While some of you may consider social and environmental, or as it is now commonly named, sustainability accounting to be a relatively novel field, this is not the case (e.g. Roberts, 2018). With its origins going back several decades, the vivid and diverse field of social and environmental accounting research provides us with a range of insights related to accounting, reporting, organisations and sustainability. This is an excellent place for the accounting research community to build on. 
As we noted above, interest in sustainability accounting is growing fast, and there are more and more capital markets scholars exploring the area. Some may have noted the increased social vibe, others have personal interests, some might be attracted to the topic through the improved availability of ESG data now included in financial databases. As a result, there is now a flourishing of papers looking at how capital markets incorporate sustainability information, how they use it, if it is useful and relevant and if it can drive efficient investment decisions. Again, this is great! However, we are concerned how the underlying assumptions may take the focus, findings and implications astray from what is at stake with sustainability. While we do not deny that investors may be interested in sustainability reporting and disclosure, nor we intend to diminish the importance of sustainability information for investors, we question whether the scope of sustainability reporting should be to address investors’ information needs or rather serve a wider, public interest in the sustainable development of our planet and society
Now, one of the reasons we signed the open letter is that we strongly believe that major policy decisions should be based on scholarly research. The Consultation Paper unfortunately does not do so. While a standard setter may deliberately decide to base its policies without considering any academic evidence, it seems fair to say that social and environmental accounting research, for the better or the worse, could potentially bring insights about the complexity of the issue of setting sustainability accounting standards and for whom. The letter we signed makes a pledge to the IFRS Foundation to consider the extant body of knowledge on sustainability accounting that has flourished in academia on sustainability reporting practices, determinants and consequences, both intended and unintended. Perhaps standard setters may not wish to consider academic evidence in their decision, but what is at stake when it comes to sustainability accounting is not just limited to the efficient functioning of capital markets. It is a lot more and all of our efforts should be concentrating on the bigger picture. 
One of the pretty clear intentions of the Consultation Paper is to reduce complexity. It does so by focusing only on investors’ needs, by initially considering only climate risk (which we remind may be “a financial risk”; but is also a risk that threatens the existence of our planet as we know it), and by limiting the focus only to financially material issues (relevant effects on the reporting entity – but what about the relevant effects that reporting entities have on the environment and society?). In essence, by such simplification, sustainability is reduced to those aspects which may have material financial impacts on the reporting entity. At the same time, the reporting entity and its activities can have substantial impacts on communities and ecosystems. These impacts are ultimately negative externalities that economists for decades have identified as problematic if not internalized. Such impacts may result in, say, biodiversity loss, water scarcity and depleted ecosystem services, which might have no relevance at all for the reporting entity. Further, all of these issues represent another set of “Tragedies of the Horizon”, as Mark Carney defined climate change in September 2015 during his speech at Lloyd’s of London, imposing a cost for future generations that the current generation may have no direct incentive to fix. While reducing complexity keeps such impacts invisible in the accounting and reporting, the real physical impacts remain and affect others. It may well be that reducing complexity makes the world of investors and standard setters easier, but it is hardly the best way to address the inevitably complex and interrelated problems that deal with the interconnectedness of our eco-systems.
The most common objection we hear is that it is hard to imagine that socially material issues wouldn’t also be financially material. And that’s where we find ourselves repeating over and over again that indeed this exactly is the problem! If they were, why is climate change only now such a pressing topic? Already ten years ago we knew it was a clear threat to our living, yet only once the regulatory risk has increased, we have started to see attention from investors and companies. Why is biodiversity loss, a matter of fundamental ecological and social materiality, not receiving attention, even though its consequences for societies are likely to be similarly serious? It is exactly because the most financially material items are not the same as the most ecologically and socially material items. And if some socially material issues may be completely irrelevant for investors, then we need to ask ourselves whether the current conceptual framework for financial reporting is suitable to account for externalities. And quite often sustainability and sustainable development require exactly an account for social and environmental externalities. The materiality perspective of the Non-Financial Reporting Directive covers both financial materiality and environmental and social materiality, as explicitly mentioned in the “Guidelines on non-financial reporting: supplement on reporting climate-related information”. Further, the same document clarifies that when assessing materiality, “companies should consider a longer-term time horizon than is traditionally the case for financial information” (p. 7).
The interconnections inherent within sustainability prompt us to ask on which grounds the new Sustainability Standards Board proposed in the Consultation Letter should only focus on climate change. Why is climate change more pressing than biodiversity loss? In this recent TED talk, Johan Rockström points to both as core boundaries. We can’t but see in the increased regulatory risk the only reason why climate change has become a concern for investors. Perhaps policy makers and regulators should be faster in tackling biodiversity loss. But if sustainability reporting were to focus on what key stakeholders needs and were based on proper engagement and dialogue with key societal parties, then perhaps sustainability reporting would start tackling issues that are socially material, while they do not (yet) raise a financial concern.
Ultimately, we signed the letter to question whether the traditional investor focus adopted in financial reporting standards is really the most appropriate for reporting on sustainability. While we do not object that some investors may have a long-term vision, we question whether investors should be considered the primary users of “sustainability” reporting. 
To achieve the Sustainable Development Goals, societies need collaboration. We need investors and companies on our side, but more fundamentally we need a real cultural shift if we want to move away from a reporting that only relates to risks and opportunities that may have financial implications for companies in the short-term (e.g. dependencies). Instead, we need information that puts the sustainability and the planetary boundaries at the core, and thereby steers the decisions of investors and organisations towards tackling the socially and ecologically most material and pressing sustainability questions. In other words, we advocate for reporting where public interest considerations become the primary information need we aim at fulfilling. 
For those of you who may be interested in reading more about sustainability accounting, we report below a reading list. By no means this list pretends to be complete and exhaustive. It really includes papers we have enjoyed reading (few of them, also writing) and that may be useful to those of you who wish to read some of the literature that has informed our thinking on these issues.
Accounting and sustainability
Bebbington, J., Larrinaga, C., 2014. Accounting and sustainable development: An exploration. Accounting, Organizations and Society 39(6), 395-413.
Bebbington, J., Unerman, J. & O’Dwyer, B. 2014. Sustainability Accounting and Accountability. Routledge, Abingdon.
Bebbington, J., Unerman, J., 2020. Advancing research into accounting and the UN Sustainable Development Goals. Accounting, Auditing & Accountability Journal 33(7), 1657-1670.
Bebbington, J., Österblom, H., Crona, B., Jouffray, J.-B., Larrinaga, C., Russell, S., Scholtens, B., 2019. Accounting and accountability in the Anthropocene. Accounting, Auditing & Accountability Journal 33(1), 152-177.
Gray, R., 2006. Social, environmental and sustainability reporting and organisational value creation? Whose value? Whose creation? Accounting, Auditing & Accountability Journal 19(6), 793-819.
Gray, R., 2010. Is accounting for sustainability actually accounting for sustainability…and how would we know? An exploration of narratives of organisations and the planet. Accounting, Organizations and Society 35(1), 47-62.
Gray, R., Adams, C. and Owen, D. (2014). Accountability, Social Responsibility and Sustainability: Accounting for Society and the Environment. Pearson.
Gray, R., Owen, D. and Adams, C. (1996) Accounting & Accountability: Changes and Challenges in Corporate Social and Environmental Reporting. Prentice Hall. 
O’Dwyer, B., 2003. Conceptions of corporate social responsibility: the nature of managerial capture. Accounting, Auditing & Accountability Journal 16(4), 523-557.
Schaltegger, S., 2018. Linking Environmental Management Accounting: A Reflection on (Missing) Links to Sustainability and Planetary Boundaries. Social and Environmental Accountability Journal 38(1), 19-29.
 Schaltegger, S., Burrit, R. 2000. Contemporary Environmental Accounting: Issues, Concepts and Practice. Greenleaf 
Carbon Accounting
Ascui, F. and Lovell, H. 2011. As frames collide: making sense of carbon accounting. Accounting, Auditing & Accountability Journal, 24(8), 978-999.
Bebbington, J., Larrinaga-González, C., 2008. Carbon Trading: Accounting and Reporting Issues. European Accounting Review 17(4), 697-717.
Bebbington, J., Schneider, T., Stevenson, L., Fox, A., 2020. Fossil fuel reserves and resources reporting and unburnable carbon: Investigating conflicting accounts. Critical Perspectives on Accounting 66, 102083.
MacKenzie, D., 2009. Making things the same: Gases, emission rights and the politics of carbon markets. Accounting, Organizations and Society 34(3), 440-455.
Gibassier, D., Michelon, G., Cartel, M., 2020. The future of carbon accounting research: “we’ve pissed mother nature off, big time”. Sustainability Accounting, Management and Policy Journal 11(3), 477-485
Adams, C., 2004. The ethical, social and environmental reporting‐performance portrayal gap. Accounting, Auditing & Accountability Journal 17(5), 731-757
Adams, C A, Druckman, P B, Picot, R C. 2020. Sustainable Development Goal Disclosure (SDGD) Recommendations, published by ACCA, Chartered Accountants ANZ, ICAS, IFAC, IIRC and WBA. ISBN: 978-1-909883-62-8
Cho, C.H., Laine, M., Roberts, R.W., Rodrigue, M., 2015. Organized hypocrisy, organizational façades, and sustainability reporting. Accounting, Organizations and Society 40, 78-94.
Cho, C.H., Roberts, R.W. & Patten, D.M. 2010. The language of US corporate environmental disclosure. Accounting, Organizations and Society 35 (4), 431-443
Michelon, G., Pilonato, S., Ricceri, F., 2015. CSR reporting practices and the quality of disclosure: An empirical analysis. Critical Perspectives on Accounting 33, 59-78.
Tregidga, H., Milne, M., Kearins, K. 2014. (Re) presenting ‘sustainable organizations’. Accounting, Organizations and Society 39 (6), 477-494
Gray, R.H. 1992. Accounting and environmentalism: an exploration of the challenge of gently accounting for accountability, transparency and sustainability. Accounting, organizations and society 17 (5), 399-425 
Milne, M.J., 1996. On sustainability; the environment and management accounting. Management Accounting Research 7(1), 135-161.
Unerman, J., Bebbington, J., O’Dwyer, B., 2018. Corporate reporting and accounting for externalities. Accounting and Business Research 48(5), 497-522.
Michelon, G., Patten, D., Romi, A. 2019. Creating legitimacy for sustainability assurance practices: Evidence from sustainability restatements. European Accounting Review 28(2), 395-425.
O'Dwyer, B., Owen, D.L., 2005. Assurance statement practice in environmental, social and sustainability reporting: a critical evaluation. The British Accounting Review 37(2), 205-229.
O’Dwyer, B., Owen, D., Unerman, J., 2011. Seeking legitimacy for new assurance forms: The case of assurance on sustainability reporting. Accounting, Organizations and Society 36(1), 31-52.
Sustainability science
Folke, C., Österblom, H., Jouffray, J.-B., Lambin, E.F., Adger, W.N., Scheffer, M., Crona, B.I., Nyström, M., Levin, S.A., Carpenter, S.R., Anderies, J.M., Chapin, S., Crépin, A.-S., Dauriach, A., Galaz, V., Gordon, L.J., Kautsky, N., Walker, B.H., Watson, J.R., Wilen, J., de Zeeuw, A., 2019. Transnational corporations and the challenge of biosphere stewardship. Nature Ecology & Evolution 3(10), 1396-1403.
Galaz, V., Crona, B., Dauriach, A., Scholtens, B., Steffen, W., 2018. Finance and the Earth system – Exploring the links between financial actors and non-linear changes in the climate system. Global Environmental Change 53, 296-302.
Jouffray, J.-B., Crona, B., Wassénius, E., Bebbington, J., Scholtens, B., 2019. Leverage points in the financial sector for seafood sustainability. Science Advances 5(10), eaax3324.
Österblom. H., Jouffray, JB., Folke, C., Crona, B., Troell, M., Merrie, A., et al. 2015 Transnational Corporations as ‘Keystone Actors’ in Marine Ecosystems. PLoS ONE 10(5): e0127533.
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About Giovanna Michelon

Chair of the EAA Virtual Activities Task Force

Giovanna is Professor of Accounting at the University of Bristol. Her research focus is at the interface between corporate governance and social responsibility, broadly this involves: building upon a stakeholder-oriented approach to governance;...

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