On December 11, 2018, the Oxford Union, the centuries-old meeting hall for contemplating civilization’s most challenging matters, served as venue for a contemporary debate over the role of accounting in facilitating capital investment toward sustainable development. Supported by a green paper authored by debate organizers Professors Richard Baker and Robert G. Eccles of Oxford’s Said Business School, the forum posed the question:
Should the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), which set generally accepted accounting standards that are mandated by securities regulators in jurisdictions around the globe, assume the responsibility of issuing mandatory sustainability accounting and reporting standards?
To advocate both for and against the proposition, the organizers assembled a group of notable leaders in the areas of investment management, corporate accounting and disclosure, and securities regulation.
Debaters for the proposition
Anne Simpson (CalPERS, Director, Board Governance & Strategy, Executive Office)
Paul Druckman (Chair, UK Corporate Reporting Council and former CEO, International Integrated Reporting Council)
Ian Mackintosh (Chair, Financial Reporting Advisory Board, UK Treasury, and former Vice Chair, IASB)
Sir Callum McCarthy (former Chair, Financial Services Authority)
Debaters against the proposition
Tom Quaadman (Executive Vice President, US Chamber Center for Capital Market Competitiveness)
Bob Herz (former Chair, FASB; Member, SASB Foundation Board of Directors)
Harvey Pitt (former Chair, US Securities & Exchange Commission)
Jonathan Bailey (Head of ESG Investing, Neuberger Berman)
These debate teams presented to a packed house, which included Oxford’s academic community as well as a streaming, worldwide audience.
Debate Chair Lady Lynn Forester de Rothschild (Founder and CEO, Coalition for Inclusive Capitalism) opened the forum by highlighting the importance of a debate over accounting standards. Referencing COP24 (24th Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC), she noted that policymakers are in agreement that the capital markets have a crucial role in developing solutions to global environmental and human crises. These markets, however, rely on the work of the accounting profession for meaningful and reliable measurements that can direct the capital markets to function for humanity’s benefit.
As the speakers raised various points during the passionate and lively debate, it became evident that the overall question, in substance, represented a series of sub-questions:
- Is sustainability information relevant to users so that corporate entities should provide disclosure?
- Should sustainability disclosures be standardized?
- Should regulation mandate sustainability disclosure?
- Are the FASB (Financial Accounting Standards Board) and IASB (International Accounting Standards Board) the appropriate institutions to take on the role of standard setting for sustainability?
Is sustainability information relevant so that corporate entities should provide disclosure?
Serving as the voice of institutional investors that oversee millions of asset owners’ retirement funds over long-term investment horizons, Simpson led off the debate by emphasizing the need for corporate investees to provide “metrics that matter,” information that is relevant to corporate performance. Today, she noted, more than 85% of the value of the S&P 500 is in intangible assets. Investors need corporate reporters to provide the market with a broader set of indicators.
In summing up the pro-team’s arguments, McCarthy observed consensus among the debaters regarding the general relevance of sustainability information and that investors are rightly seeking this information. This consensus represents movement toward sustainability reporting that might have been unachievable just a few years ago.
The need for sustainability reporting standards
Despite the general agreement over relevance, in leading off for the opposition team, Quaadman seemingly challenged the need for standardization by observing that there are now ever-increasing channels of communication between investors and corporate entities.
However, several speakers in favor of the proposition noted that the market is moving too slowly. Describing much of the available, sustainability-related information as “sub-par,” Simpson asserted that for information to matter, it must be comparable, which means that standards are necessary. In his remarks, Mackintosh similarly observed that although 85 percent of companies now issue some form of sustainability reporting, it is not comparable.
Multiple speakers identified the increased attention to the guidance issued by the San Francisco-based Sustainability Accounting Standards Board (SASB) to support the contention that industry-based standards are developing and voluntary reporting is gaining ground. Herz specifically cited the growth in SASB’s global recognition since the organization’s founding in 2011 and concluded that the markets have already moved “quite far, quite fast.”
Responding to these points, Simpson stated that while she and CalPERS support the work of SASB, actual reporting under their framework has been slow, and the market cannot wait for the various sustainability standards groups to sort out leadership. Summarizing many of the debate points, McCarthy observed that voluntary reporting has led to an excess of data, but the real question is whether it is the “right data.” Bailey similarly opined that many market participants are actually seeking to identify and measure total long-term value, which appears to be a point upon which true consensus might be built.
Should regulation mandate sustainability disclosure?
Standardizing sustainability reporting under the FASB and IASB would represent a major step toward regulation. Today, the standards issued by FASB and IASB are part of the securities oversight systems set by individual jurisdictions around the world. As Herz observed, in issuing standards, the FASB and IASB must work within this legal and regulatory framework.
Quaadman noted that the number of companies willing to raise capital in the public markets has been declining, partly because the current system of regulation and mandatory reporting, originally developed in the 1930s, “no longer works.” His comments implied that adding new reporting burdens would drive even more entities away from the public markets. Multiple members of his opposition team asserted that a fear of lawsuits, presumably based on these regulatory schemes, has led to more boilerplate disclosure.
Pitt emphasized the “pragmatic consequences” of regulation, including the cost of implementing new disclosure requirements. For example, today the US Securities & Exchange Commission (SEC) reviews corporate filings, issues comment letters to companies to clarify disclosures, and undertakes legal action for regulatory violations.
Druckman responded passionately about the need for urgent response to significant, imminent global risks. This is a moment, he emphasized, that we “cannot ignore.” In his view, market-based approaches are moving too slowly, and time is against us. Modern civilization is based on the capital markets, and the capital markets must drive solutions.
Are the FASB and IASB the right bodies?
In a measured response, Bailey noted that assigning sustainability reporting standards to the FASB and IASB, which operate within these securities regulation systems, could result in “unintended consequences.” He observed that giving this standard-setting responsibility to FASB and IASB, in fact, could “undermine the progress” that SASB has achieved.
Herz similarly stated that FASB and IASB are not the right bodies to assume this responsibility because these bodies lack bandwidth, personnel, and leaders with the right expertise. Herz again pointed to SASB as the right institution. In the close of the debate, Bailey echoed this view: SASB is the better group.
Asserting that the FASB and IASB need to “start doing their job,” Simpson read aloud from the FASB conceptual framework, which articulates the objective of financial reporting as providing material information for market decision-makers. Druckman furthered this view by noting that the FASB and IASB already have credibility, process, and acceptance, which make them the right bodies to issue sustainability reporting standards.
Looking to the history and organizational structure of the FASB and IASB, Mackintosh noted that the Financial Accounting Foundation (often known by the acronym “FAF”) and the IFRS Foundation, which support the actual standard-setting boards, could expand to create new boards to take responsibility for sustainability reporting. For example, the FAF previously established the government accounting standards board (GASB) to address the needs of government entities and their stakeholders. According to Mackintosh, this could be the model for incorporating a board such as a sustainability standard-setting body.
Quaadman asserted that the mandate of the FASB and IASB, which focuses on the needs of “investors” (meant in conventional sense of lenders and equity holders), is too narrow to include sustainability reporting, which aims to provide information for a broader list of stakeholders. Quaadman indicated that certain stakeholders, such as employees, lack the same interests as investors in an employer’s financial performance.
Is sustainability really a different, separate, and distinct from financial reporting?
In arguing against assigning sustainably standard-setting to the mainstream accounting boards, Herz described sustainability accounting and reporting as “separate from” financial accounting and reporting. Pitt similarly opined that it would be too confusing to the market to “transmute financial reporting into sustainability reporting.”
Druckman, however, challenged the assertion that sustainability information should reside in its own separate silo and advocated the integration of sustainability information into financial information. Pro-proposition advocates queried, “What is the cost of the California fires?” Druckman noted that climate change now has an estimate price tag of £23 trillion.
Simpson agreed that these factors, such as climate change, must be integrated into financial statements, and the timing of this process needs to accelerate. In summary, the “pro” debate team opined, therefore, that the FASB and IASB team must take the lead. McCarthy concluded, “If we had the will, we could get them to do it.”
In the end, the body affirmatively adopted the resolution by a 2 to 1 vote of “yeas” over “nays.” Because the debate addressed multiple sub-points, it remains unclear whether the audience was expressing the desire for a general result -- accounting for sustainability -- or a specific process by the FASB or IASB. The audience’s response to the debate, however, made abundantly clear that it wants action.