An advisor to the International Accounting Standards Board (IASB) has warned that companies will struggle to comply with the complexity of providing hard numbers about the impact of climate change on their businesses.
Mike Tovey, corporate controller at Bank of America, said the disclosure obligations proposed by the IASB’s sister board, the International Sustainability Standards Board (ISSB), would be “extremely difficult to model ”.
He added that the challenge was “way more complex” than existing disclosures about financial instruments under International Financial Reporting Standards (IFRSs). He also questioned the wisdom of proposing quantitative disclosures.
The comments from the veteran accountant – whose career highlights include a stint as a staff member with the US accounting rulemaker, the Financial Accounting Standards Board – came during a 17 June joint meeting of the IASB’s preparer advisor body, the Global Preparers Forum, and its Capital Markets Advisory Group, which is made up of investor representatives.
Tovey said: “We’re talking about climate change in a pattern that is unprecedented, that has never been seen before, right? You can’t look at historical climate-change patterns because they don’t hold for a manmade […] period of climate change. So that’s number one.
“Number two, you know, we’re working with some of the leading-edge companies that are building weather models. And it’s crazy, you know, the volume of assumptions that go into this.”
The ISSB released its proposed climate-change disclosure rules, International Sustainability Reporting Standard 2, in March.
The standard describes the requirements for identifying, measuring and disclosing climate-related risks and opportunities.
It explains that this information will complement an entity’s general purpose financial reporting and assist “users of the information in assessing the entity’s future cash flows, including their amounts, timing and certainty, over the short, medium and long term”.
In addition, the ISSB is also seeking comments on a companion draft sustainability standard, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information.
This standard sets out broad requirements for disclosing sustainability-related financial information to primary users of financial statements.
The disclosures in both exposure drafts are subject to a materiality test and as a starting point must address governance, strategy, risk management and metrics and targets.
In addition to the link with financial reporting, IFRS S1 explains that “an entity shall refer to and consider the applicability of the interrelationships among each of these four core elements, including between IFRS [S2].”
In response to the concerns raised by Tovey, ISSB staff noted the parallel proposals from the US Securities & Exchange Commission in fact contain a “safe harbour provision” where companies start implementing the requirements.
Staff, however, reminded the meeting there was strong demand from investors for sustainability information, including from “some of the world’s biggest pension funds.”
They added that although users acknowledge the information disclosed might not be perfect, “they would much rather have an estimation and a bit more of a dialogue” to gauge a company’s reading of the issue.
Another worry among businesses is the proposed requirement to link sustainability disclosures to the financial statements.
Staff said they expect the process to start with companies discussing “how significant climate-related risks and opportunities have affected the most recently reported financial statements” before going on to describe its financial impact and how that is likely to change in the future.
Meanwhile, it also emerged during the 17 June meeting that the IFRS Foundation has yet to appoint sufficient board members to make the ISSB quorate.
IASB member Nick Anderson said: “[I]n terms of due process, we can’t move to that next stage until we have a quorum. That that process is ongoing. We’re confident that we will be there.”
On 8 June, the IFRS Foundation announced the appointment of four new board members to the ISSB.
The board has committed to hold its inaugural meeting on 18 July and to begin redeliberating the two draft sustainability standards ahead of finalising them by the end of the year.