A blast from the past

| This article was written by our founder Clive Lotter in October 2014 and published in ASA in December 2014. In this piece he discusses the rise of ‘non-financial factors’ in business accounting and also predicts the consolidation of global reporting standards such as GRI and SASB. |

Few predicted the Asian financial crisis of 1997/98 and the 2001 Enron shock – and the finger of blame pointed directly at accounting standards. Most countries, including South Africa, have since adopted the International Financial Reporting Standards (IFRS) set by the International Accounting Standards Board (IASB), while the USA based Financial Accounting Standards Board (FASB) prescribes the US GAAP standard for American private sector companies. In 2002 these bodies began working together (“the Norwalk Agreement”), to harmonise IFRS and GAAP into a global accounting framework. This meticulous and often testy process was accelerated by impatient G20 leaders following the bigger shock of the 2008 meltdown. The USA is moving to adopt IFRS and accountants everywhere are now bombarded with a stream of IFRS updates.

The focus is has shifted to sustainability accounting, for decades the ignored stepchild of corporate accountability. Recent surveys show that companies reporting on their sustainability impacts are outperforming their competitors in key financial indicators and share value, while also identifying new environmental cost savings and reacting quicker to market trends.

Nonetheless, fund managers and analysts have paid scant regard to sustainability factors when evaluating companies. Yet climate change is coming – and not only in the environmental sense.

We have unmistakably entered an age in which extreme weather events can disrupt global supply chains, or companies could lose their licences to operate through environmental or social misbehaviour. Shareholders in growing numbers are demanding non-financial feedback in annual reports, prompting the pension funds and large institutional investors to start paying serious attention.

The Global Reporting Initiative (GRI) is being internationally recognised as the preferred sustainability reporting standard, but like the earlier face-off between IFRS and US GAAP, there is an American counterpart. In 2012 the Sustainability Accounting Standards Board (SASB) was established in the USA to write up sustainability standards described as “useful, cost-effective, comparable and auditable.”

These standards guide companies on ‘material’ sustainability disclosures for the 10-K or 20-F forms they regularly submit to the USA’s Securities and Exchange Commission (SEC). The SABS has taken a fast and energetic approach to industry by industry, sector by sector setting of standards and by 2016 intends having sustainability accounting standards issued for nearly 90 industries in 10 sectors.  Whereas GRI offers a helicopter view of company sustainability for all stakeholders, the SASB standards take a ‘nuts and bolts’ approach to the material risk and opportunity sustainability issues that concern investors.

This time round there’s no competition: the GRI and SASB standards fit together well, with sustainability accounting now tracking harmonised financial accounting. We’re not far now from the ‘holy grail’ of global accounting standards for financial and non-financial reporting – with a new line of work opening for accountants.

Clive Lotter | October 2014 |

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