European legislation aims to put sustainability reporting (extra-financial) on the same footing as traditional financial reporting. Yet one link remains unchanged, that of accounting. Can investors see clearly without an accounting system that integrates sustainable development?
Europe is progressing in the extra-financial reporting legislation, which must capture relevant information from organizations and allow investors and other stakeholders to obtain more information and knowledge of performance, risks, opportunities and long-term prospects of the company. However, to get responsible investors, companies must first commit to providing responsible management and production of goods and services. Extra Financial Reporting or Integrated Accounting, what are the real needs of investors?
How to assess sustainability in figures?
Can conventional accounting offer to investors enough clarity to identify the performance of a sustainable company compared to another company not engaged into the transition, and yet operating in the same industry?
Transition has a cost for businesses. And capital invested specifically to change internal processes, reduce emissions and impact is not differentiated in the standard P&L. Capital used for transition weighs on company’s profit and ROI (return on invested capital) and therefore on its performance, eventually favoring on short term and equal sector, to non-responsible company. The extra-financial report will show a company trend to move forward in terms of natural resources or emissions reductions, but investors need numbers. What share of the capital was used for the transition, what charges and/or environmental and social debt actually generate a profit or are deductible from the EBITDA? And therefore at what scale and for what term is it profitable or not for investors / shareholders?
We can welcome the new non-financial reporting legislation with enthusiasm, but we must not lose sight of the fact that the basis of all reporting is an upgraded accounting capable of integrating more intangible notions such as the value creation of the sustainable development, the value destruction of an activity or the cost of maintaining the environment.
To integrate these concepts several specialists are working on the subject. Some suggest to integrate negative and positive social and environmental externalities into P&L; to model the impact of the internalization of risks linked to the price of carbon, water distress, extreme climatic factors etc …; or to account for intangible assets such as human and natural capitals.
Accounting plays a key role in the development and implementation of reporting frameworks and normative initiatives that reach beyond traditional financial reporting, including the creation of internal control systems and processes. sound, identifying, and communicating relevant metrics based on good practice or reporting standards.
For this reason, accounting must adapt and support the transition to a carbon neutral economy, and to do so review its fundamentals.
According to IFAC – the International Federation of Accountants, which comprises 180 member and associate organizations and represents more than 3 million professional accountants globally
« time for a global solution has come to answer the demand from investors, policymakers and other stakeholders for a reporting system that delivers consistent, comparable, reliable, and assurable information relevant to enterprise value creation, sustainable development and evolving expectations. Because a fragmented approach perpetuates inefficiency, increased cost, and a lack of trust. »
Important work is underway (e.g., WEF/IBC metrics, IOSCO’s task force, EFRAG’s preparatory work, and alignment between the leading reporting initiatives), and these efforts should continue and ultimately contribute to the emerging global system
These tools should allow investors to clearly identify the production or destruction of a company’s environmental and social value over the long term, its cost of maintaining natural and social capitals, and to value the company not only in terms of performance, but also according to its environmental and social optimization.
Article: Joana Foglia