7th Colloquium opening statement
Professor Mervyn King
- 19 May 2022
The changing market cap
Towards the end of the 20th Century, the limited liability company was using natural assets faster than nature was regenerating them – clearly not a sustainable matter. By 1997, it became apparent that the makeup of the market capitalisation of some iconic companies was changing as a result. As we turned into 21st century only about 20% of the makeup of the market cap was reflected as additives in a balance sheet according to financial reporting standards. This led to the drafting of guidelines by the Global Reporting Initiative (GRI) to guide corporations, and other organizations, on how to report on these incorporeals, intangibles, sustainability and now called ESG — Environment, Social and Governance — issues.
Impacts on duties of accountability
When I was Chairman of the United Nations on Governance and Oversight and Chairman of this Global Reporting Initiative IFAC held a meeting at the United Nations. We discussed how directors were not discharging their duties of accountability in the following cases:
- annual reports consisting of only financial statements that did not reflect the make-up of the market cap; and
- financial statements and reporting on the impacts of the company on the economy, society and the environment that was divorced from reality as these things work together, not in silos
The discussions then started about connecting or integrating this information.
Reporting to effectively demonstrate accountability
Connected Reporting or Integrated Reporting? The etymology of the word connecting is link and the etymology of the word integration is system. It was therefore argued that the term “Integrated Reporting” would better reflect what was required. This led to the GRI and Accounting for Sustainability (A4S) launching the International Integrated Reporting Council (IIRC), of which I became the Chairman.
The start of Integrated Reporting
In 2009, as Chairman of the King Committee on corporate governance in South Africa, we recommended that South Africa should follow an approach of integrated reports and drafted a framework for such a report. The Johannesburg Stock Exchange agreed and made integrated reporting a listing requirement. The IIRC used this as the basis on which to develop the <IR> Framework which has become well known as the International Integrated Reporting Framework. This was the start of integrating the financial and non-financial information.
Inside-out and outside-in
Importantly though, we were still looking at sustainability from the ‘inside-out’ – the impact of the company and its products and outcomes, on the economy, society, and the environment. Meanwhile there were some seismic events, such as the collapse of Lehman Brothers, which showed the impacts external factors could have on the company. It was these events that launched the Sustainability Accounting Standards Board (SASB). SASB started looking at sustainability from the ‘outside-in’ – that is from the perspective of the impacts of the Brundtland Commission’s three critical dimensions for sustainable development (people, planet, and prosperity) on the company. We saw that sustainability, like a coin, had two sides.
A myriad of standards developed and are now consolidating
Thereafter a myriad of framework providers and standard setters leaped into this ESG space. I gave a talk in London where I said that it was a moral and social outrage that standard setters saw themselves as competitors when they all should have the same outcome in mind – namely a global comprehensive corporate reporting system. I said we needed some consistency in this reporting rather than the clutter and confusion which was being created for preparers and users. I am told that this had some effect and soon the Group of Five, which included the IIRC and SASB, issued a statement of intent to collaborate. Inevitably, collaboration led to talks of merger and SASB and the IIRC merged to create the Value Reporting Foundation (VRF). Further progress led to a ‘sale’ of the VRF to the IFRS Foundation (IFRS) and the SASB standards were pushed into a new body, the International Sustainability Standards Board (ISSB) under the oversight of the IFRS, a sibling to the International Accounting Standards Board (IASB). This is due for completion by the end of June 2022.
The positioning of Integrated Reporting Framework
The <IR> Framework, as a result, is being positioned within the IFRS Foundation. There is a problem with this because, although the IASB and ISSB have the authority to set standards and evolve, the IFRS Foundation does not have such powers as it is positioned as a monitoring and oversight board under IOSCO. I speculate that the answer to this problem is for the IFRS to pass ownership of the <IR> Framework jointly to the IASB and ISSB to form a Working Group in regard to the <IR> Framework. This would be a baseline for the creation of the integration and connectivity of the financial and non-financial information. Meanwhile the ISSB would issue baseline sustainability reporting disclosures on which different jurisdictions, using a building blocks approach, can add pertinent layers.
Common cause
The beginning of the end of clutter and confusion was the issuing of the statement of collaboration. Now we are at the beginning of the end of all that. We are creating a large stepping-stone towards moving from one side of the river of corporate reporting’s clutter and confusion to the other side of a global comprehensive corporate reporting system. What is intriguing in the developing standards and regulations — the European Union’s European Sustainability Reporting Standards (ESRS), China’s statements, the ISSB Standards and the United States Securities and Exchange Commission’s regulations — is that there is common cause; a need for connectivity between financial and non-financial information.
Hence, the content and the theme of the 7th Colloquium – “Connectivity”.
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