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09 Feb The Merger Intention of IIRC and SASB: Anticipate a Global Reporting Framework
The International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) announced on November 25, 2020, that they intended to merge into a new organization, called the Value Reporting Foundation (VRF). This move aims to offer investors and enterprises a unified and comprehensive corporate reporting framework, covering all corporate value drivers and standards. VRF will retain IIRC’s original comprehensive reporting framework, which describes all relevant value creation factors, such as financial capital, productive capital, human capital, and intellectual capital, and approach to integrating these factors in the corporate reporting. At the same time, the new organization will also adopt the precise definition of industry reporting indicators by SASB. VRF will promote the integration of the two parties’ framework and standards, while further improving enterprise value reporting framework and system.
IIRC: integrated reporting
Integrated reporting is a process founded on comprehensive thinking, which results in a periodic integrated report by an organization about value creation over time and related communications regarding value creation. An integrated report should deliver information about how an organization’s strategy, governance, performance, and prospects, in the context of its external environment, lead to the value creation in the short, medium and long term. IIRC has issued the International Integrated Reporting Framework to accelerate the adoption of integrated reporting across the world. In January, IIRC published revisions to the framework, based on the original one released in 2013, consulting with 1,470 individuals in 55 jurisdictions. The framework develops a set of guidelines and contains eight content elements; however, it does not clarify specific indicators and measurement methods.
IIRC considers an integrated report should include the following eight content elements:
- Organizational overview and external environment
- Business model
- Risks and opportunities
- Strategy and resource allocation
- Basis of preparation and presentation
At present, more than 1,700 organizations in more than 70 countries have prepared integrated reporting, especially companies from South Africa and Japan. A total of 99 institutions from 25 countries and regions in ten industries, including a few non-profit organizations, participated in the pilot project of integrated reporting. Among them, there are 13 enterprises in the UK, 12 in the Netherlands, ten in Brazil, eight in Italy, seven in Spain, six in the US, and only one company from China.
In 2005, the Chinese Mainland’s accounting standards for business enterprises had been adjusted in line with international financial reporting and Hong Kong began to adopt the International Financial Reporting Standards (IFRS). In 2014, IIRC entrusted the Chinese Institute of Certified Public Accountants (CICPA) to host the Chinese translation of the integrated reporting framework. in the same year, the Chinese version of the International Integrated Reporting Framework was formally published. Nevertheless, China’s integrated reporting is still in the exploratory stage and related organizations are actively studying the integrated reporting framework that most suitable for Chinese enterprises.
SASB: sustainability indicators
As a non-profit organization, SASB focuses on developing a series of ESG disclosure indicators for specific industries, and promoting the exchange of relevant information that has a substantial impact on financial performances and helps decision-making of investors and enterprises. It believes that the market value of enterprises not only depends on financial performance, but also on intangible assets, such as intellectual capital, customer relationship, brand value, and environmental, social and human capital.
In 2018, SASB issued the world’s first set of sustainable development accounting standards, namely SASB Standards. SASB Standards are designed for companies to communicate with their investors about their sustainability and the way sustainability issues drive long-term corporate value. SASB also published a new industry classification method, namely Sustainable Industry Classification System (SICS), based on the traditional industry classification system. The SICS re-categorized enterprises into 11 sectors and 77 industries based on its business type, resource intensity, sustainable influence, and sustainable innovation potential. In the meantime, SASB applied the most relevant topics from its 26 general issue categories to each industry, and developed a materiality map for display, in collaboration with Bloomberg.
By 2020, about 556 companies disclosed SASB metrics in their public company communications, 39% of which are out of US. In addition, 204 institutional investors support SASB by becoming members of SASB Alliance or licensing SASB standards, representing USD61tr worth of asset under management (AUM) and 21 countries.
Impact of IIRC and SASB’s merger intention
The global framework and standards of financial and non-financial information reporting tend to corporate with each other. In September 2020, CDP, CDSB, GRI, IIRC, and SASB released a statement of intent to work together. Also, VRF, expected to be formed in mid-2021, stands ready to work with the IFRS Foundation, IOSCO, EFRAG, CDP, CDSB, GRI, etc. It is believed by global investors and corporates that in the future, there will be a set of globally accepted standards.
Deutsche Bank [DBK:GR] released a report on January 23, highlighting the COVID-19 pandemic has made an increasing number of investors aware of the financial market impact caused by non-financial risk. ESG factors, especially the major financial risks caused by climate change, are getting rising attention. The research team of Deutsche Bank believed the merger of IIRC and SASB will play a positive role in promoting the simplification of reporting standards, but there are challenges in implementing a unified ESG reporting standard to guide capital allocation in the short term. The research team also suggested enterprises to include two main ESG factors in its reporting standards: one is to measure the impact of ESG related risks on corporate performance, and the other is to measure the impact of ESG initiatives on society and environment.