On a chilly evening in early December 2018 the Oxford Union was filled to capacity to witness a debate on the seemingly arcane topic of non-financial information.

The motion before the House was the question as to whether corporate sustainability reporting should be mandated and standardised by the FASB and IASB for it to be most useful for investors.

The debate itself was a spirited mixture of rhetorical flourish, informed insight and entertainment, replete with cries of “rubbish”, accusations of rudeness, continual interruptions and cocksure interjections from swashbuckling undergrads.

At the end of it all, the House was divided on the question at hand, with no clear outcome by show of hands nor by vocal ayes and nays.

Of note, however, is less who the won the debate than the fact that non-financial information, which investors often call ESG (environmental, social, governance) reporting, is being debated publicly, and passionately, as a serious matter for financial standard-setters—and broader public policy.

Differing philosophies

The fault line laid down in the Oxford debate as to the desirability of the accounting standards bodies to take on non-financial reporting under their wings was in many ways a reflection of differing economic philosophies. If there was an elephant in the room shaping these different philosophies it was geographical bias—one with a strong American accent, the other very much British/European.

The American perspective is characterised by the view that financial accounting information and standards are fundamentally different from non-financial reporting, and that it is inappropriate to blend the two. This reflects in many ways a traditional, and narrow, focus on the primacy of rules-based financial reporting, for the benefit of shareholders. It also belies a sometimes overt—and sometimes unstated—suspicion of the political agenda of those who advocate ESG reporting.

On the opposite side of the Atlantic, both in continental Europe and in the UK, the argument reflects a different vision of capital markets and corporate reporting. ESG reporting is regarded less as a political preference and more as a broader view of risk and opportunity—both for individual companies, but also for stakeholders, societies and markets more broadly.

In the UK this reflects the core directors’ duties in Section 172 of the Company Act of 2006 to “have regard” for stakeholder interests in promoting the long-term success of the company. It also builds from the recent focus given to stakeholder relations in the 2018 revision of the UK Corporate Governance Code.

In this context, ESG reporting is a way to communicate many non-financial aspects of stakeholder relations, and integrated reporting is growing in visibility for a platform to frame financial, ESG performance and other forms of non-financial disclosures in a unified way.

The value of ESG reporting

While the debate on the role of standard-setting bodies in non-financial reporting may be at an impasse, the investor community has begun to weigh in to this argument, not by expressing specific regulatory preferences, but rather by explaining why investors value ESG reporting and what they are looking for from companies and standard-setters.

To this end, in October 2018 the International Corporate Governance Network and Principles for Responsible Investment published a discussion paper supported by contributions from a group of global investor organisations. It framed the understanding of ESG issues as a fiduciary duty of investors interested in long-term corporate success and addressed a wide range of reporting questions.

Of the many points addressed the key conclusions were as follows:

• There is a clear business case for ESG reporting for investors and companies. Particularly in a world in which 85–90% of market capitalisation can be in the form of intangible assets, ESG reporting can help investors and companies better understand material ESG-related risks and opportunities that help to account for these intangibles. Academic studies increasingly support the claim that there is a clear linkage between ESG factors, company performance and investor preferences.

• There is no single solution—one set of metrics or a single framework—that will satisfy all users of ESG data. The heterogeneity of ESG data users —investors, stakeholders and companies—will remain, and this is not inherently a bad thing. However, it should be possible to serve different needs and still come to a more unified agenda. From companies’ perspectives, ESG issues are endogenous and difficult to standardise. In spite of these challenges, we believe that companies should seek to identify and publish material ESG issues and relevant key performance indicators (KPIs) as part of their annual reports. Integrated reporting may provide a good framework for this.

• At the same time, it would be beneficial for companies to disclose standardised ESG information at a basic level to complement more customised ESG reporting, just as financial accounting has required its own disclosure standards. Over time, this can lead to developing standards of third-party assurance with regard to ESG information.

• Both investors and companies need to think more about systemic issues, including the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, the UN Sustainable Development Goals (SDGs) and their links to individual companies. For companies this is a matter of strategy and sustainable value creation. For investors, particularly those with longer-term time horizons, systemic risks need to be reflected in valuation models and incorporated into engagement with company executives and board members.

• Investors would benefit from members of the Corporate Reporting Dialogue (CRD) proactively articulating how its different bodies fit together. The CRD is an important initiative to provide a clear direction and coordination for a range of standard-setters of both financial accounting and non-financial information. It is positive to note that the CRD has embarked upon a two-year project aimed at greater harmonisation of its constituent bodies, exploring the complementarities, as well as the potential disconnects or conflicts. Investor bodies are in dialogue with the CRD and we believe that a workable “solution” can be achieved with the existing data providers and standard-setters: namely, the current members of the CRD. Investors generally support improving coordination of existing frameworks rather than creating new ones. However, it is incumbent on the standard-setting organisations to present a coherent vision of how these standards can and should work together.

As to the question as to whether it should be FASB, IASB or some other standard-setter to mandate and standardise non-financial information, that debate may have greater clarity at the end of this CRD deliberation.

But what is the endgame?

A commonly agreed vision between issuers, investors and standard-setters is a nice place to start—one that enables ESG reporting to grow in quantity, relevance and quality—with a view towards a wider understanding of opportunities and risks for all market participants.

George Dallas is policy director at the International Corporate Governance Network.