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ABSTRACT
This paper examines incentive effects of sustainability reporting, based on proposals for mandatory sustainability reporting standards in the EU, the US, and the IFRS Foundation, and highlights conceptual differences between sustainability and financial reporting. Sustainability reporting is an instrument of transparency regulation intended to influence management decisions. It requires disclosure of a large set of data points but does not provide aggregate measures. It is production-oriented and does not include accruals. It expands reporting to include disclosure of long-term policies and targets, and of information of firms in the value chain. Consequently, sustainability reporting is not very useful for tracking sustainability performance and for comparisons across firms. Overall, it would benefit from applying more generally accepted accounting concepts.
Acknowledgments
The paper has benefited from comments by Gilad Livne (editor), Andrea Sternisko, Theresa Wittreich, and from participants of a presentation in the initiative Business Valuation Accounting & Auditing at the University of Linz.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 See FASB (Citation2019), IASB (Citation2020a).
2 See Schipper (Citation2022) for reasons of such difficulties.
3 For an overview of distinguishing features between sustainability and financial reporting see also Christensen et al. (Citation2021) and EFRAG (Citation2023).
4 For an overview of sustainability reporting standards and frameworks see, e.g. Stolowy and Paugam (Citation2023).
5 In terms of industry-specific standards, the SASB has published 77 standards.
6 See IFRS S2, para. 23, and ESRS E1, para. 32. In an EFRAG Conference on December 7, 2022, Sven Gentner, Head of Corporate reporting at the European Commission, described the ESRS as ‘not policy-agnostic.’
7 See also Christensen (Citation2022).
8 While this is a large quantity, it should be noted that IFRS disclosure checklists that are available from big audit firms also comprise 100–200 pages, but these are all disclosures of information underlying the preparation of the financial statements.
9 See, e.g. Lymer et al. (Citation1999), Xiao et al. (Citation2002). Many of these analyses would require more granular tagged data than is available in an annual report.
10 An exception is the aggregate measure of CO2 equivalents, which is based on physical properties of six greenhouse gases.
11 See, e.g. Sorter (Citation1969) with an events approach.
12 El Gibari et al. (Citation2019) review methods of forming composite measures from individual data.
13 See Bebchuk and Tallarita (Citation2022).
14 This also holds for a balanced scorecard. See, e.g. Rotaru et al. (Citation2020).
15 See, e.g. Loumioti and Serafeim (Citation2022).
16 For surveys see, e.g. Frost and Jones (Citation2015) and Sellhorn and Wagner (Citation2023).
17 The GHG Protocol (Citation2004) offers an option between the control and the equity share and approach.
18 It should be noted that the scope of sustainability reporting is broader than that of the CSDDD, as sustainability reporting is mandated for a larger set of firms.
19 See Kaplan and Ramanna (Citation2021), p. 123.
20 For examples, see GHG Protocol (Citation2011), ch. 8.
21 Note that information technologies allow to collect actual data on customer usage of products, these are unhelpful to forecast future usage, particularly for long useful lives of products.
22 The definition of scope 2 emissions has been amended in the revised GHG Protocol (Citation2004) to exclude emissions from electricity purchased for resale.
23 A firm that has not adopted targets needs to explain the reasons for that and whether it tracks effectiveness otherwise (ESRS 2, para. 79). The implicit assumption is that pressure on firms by stakeholders would induce it to set acceptable targets.
24 For example, in the exposure draft on amending the accounting of business combinations mentioned in the Introduction (IASB, Citation2020a) there was strong opposition by preparers to require disclosure of targets and their achievements for business combinations.
25 For example, the SEC (Citation2022) climate-related disclosure proposal includes a safe harbor for scope 3 emissions disclosure. Article 19a (3) of the CSRD offers a limited member state option for not disclosing information that is seriously prejudicial to the firm’s commercial position.
26 CEPS and Milieu (Citation2022), pp. 55-57. Litigation is also mentioned as a major risk in GHG reporting (GHG Protocol, Citation2015, p. 12).
27 See, for example, IASB (Citation2020b). In March 2023, the IASB added a narrow-scope project on climate-related risks in the financial statements.
28 See, e.g. EFRAG (Citation2023).