Band 10, Heft 2 - Rethinking Non-Financial Reporting: A Blueprint for Structural Regulatory Changes

The article introduces the thematic issue of Accounting, Economics, and Law: A Convivium dedicated to the regulation of non-financial reporting. It provides the reader with an overview of the varying approaches and frameworks that have emerged over time in relation to the reporting of non-financial information. In particular, the article focuses on the European Non-Financial Reporting Directive. We maintain that to date this latter initiative has failed to deliver on its intended objectives. In the context of the ongoing revision process of this initiative, the present paper outlines five key areas to be improved drawing on the lessons learnt from the past as well as from key points raised by the papers in the present thematic issue. What emerges from this collective effort is a renewed agenda that highlights some of the structural failures of the current reporting regime and a blueprint for future reforms. The final section summarises the various contributions of articles included in this thematic issue.

Non-financial reporting reforms have moved ahead around the world as governments work to advance sustainable development and improve environmental, social, and governance (“ESG”) risk management by firms and investors In the United States, however, non-financial reporting reforms face resistance and have lagged behind. This article offers an overview of the state of non-financial reporting in the U.S. and explains why the U.S. approach still diverges so visibly from the reform path adopted by other governments around the world. It then suggests potential directions for non-financial disclosure reform that take account of the U.S. institutional context. The article concludes by considering the implications of the United States’ market-driven approach for non-financial reporting reform and for the future of sustainable finance more broadly.

An interesting relatively new development in the field of corporate climate change disclosures is the Task force on Climate-related Financial Disclosures (TCFD). The TCFD aims to help identify the information needed by financial stakeholders to appropriately assess and price climate change related risks and opportunities. In its first Report (2016), the TCFD recommends that companies provide climate change related disclosures specifying the impact thereof on their financial performance through mainstream (i. e. public) financial filings. In this paper, we look at the financial accounting standards as an institutional framework, and in particular pose the question to what extent this framework supports companies to disclose how climate change impacts their operations and the value of the production assets. To test to what extent companies make disclosures in relation to climate change, we selected four energy companies and conducted a comparative case study analysis. Our focus is on the valuation of production assets, more specifically, drilling platforms, windmill platforms, heavy equipment and transport means used to support the production, and pipes and cables to transport the energy units produced. Interesting findings were: (i) in all four cases, potential future changes (caused by climate change) concerning the valuation of the production assets are not (yet) accounted for in their Balance Sheet Annex. This is remarkable because climate change is likely to have an effect on the future value of the production assets employed in the two types of industries, among others caused by the development that renewable energy demand increases at the expense of non-renewable energy demand; and (ii) the current financial reporting system does not support renewable energy companies to provide meaningful and quantitative insights in expected increases of their future cash inflows and their financial and innovation potential. This impedes financiers and investors to accurately and meaningfully assess the value of a renewable energy company’s business compared with a non-renewable company’s business.

CSR practices and reporting vary across countries and companies. Accouting studies using institutional theory show that even where there are coercive pressures to converge, local practices and traditions are other types of pressures that play a role in maintaining divergence. Similarly, legal studies indicate that harmonisation attempts made by the European Union are usually challenged by States attempting to maintain the status quo of the local context, and this may also apply to CSR reporting harmonization. This research investigates whether or not the institutional pressure toward non-financial reporting harmonization represented by the Directive/2014/95/EU led to convergent behaviours between Member States, at least at the transposition stage. Transposition laws in Member States where CSR has historically played a limited role (i. e. Romania and Bulgaria) are compared with those issued by countries where CSR traditions are much more well developed (France, Belgium and the UK). The analysis focuses on how both mandatory and discretionary requirements have been transposed at a national level. The transposition outcome is analysed in the face of economic-, government- and society-related factors of each country and results show that on several occasions, divergence is catalysed by differences in national business systems. This is aligned with the results of previous studies (e. g. Jamali and Neville, 2011), which argue that historical, cultural, economic and political local contexts mould the CSR conceptualisation existing in a given country, and therefore the convergence of different CSR practices is only apparent.

The purpose of this paper is to enhance our understanding of the notions and conceptual foundations of assurance in the standard setting arena. This will facilitate an informed discussion of the challenges and the role of assurance within an increasingly complex and fragmented corporate reporting regulatory landscape. The study draws on relevant literature on sustainability assurance and an analysis of how the assurance concept has been framed by the International Auditing and Assurance Standards Board (IAASB) through the construction of standards. The analysis highlights that the fragility of the conceptual foundations of assurance, broad-based nature of standards and diversity in practice contribute to the persistent challenges of sustainability assurance. This paper makes an important contribution to the discussions and contemporary debates on the regulation of and through assurance as well as the complex newer concept of integrated assurance. It further contributes to a more informed policy discussion as to how it can(not) strengthen the role of non-financial reporting as an agent of change to encourage more sustainable companies.

According to the Cadbury Committee (1992) classical definition, corporate governance is ‘the system by which companies are directed and controlled.’ In the Cadbury Report and in other mainstream corporate governance codes, ‘system’ refers only to the ‘financial aspects of corporate governance’, that is, shareholder value and emphasis on the board’s and the management’s accountability to providers of financial capital only. During the last few years however, sustainability has been included through ‘integrated reporting’ in corporate governance codes especially in Africa (South Africa) and Asia (Malaysia, Philippines). For example, the South African King reports on corporate governance connect the use of integrated reporting to report on an organisation’s corporate governance practices and economic-social-environmental triple-bottom-line performance. The leading normative framework for integrated reporting, the International Integrated Reporting Council’s International <IR> Framework, is based on an idea of ‘shared value creation’ by providers of the ‘six capitals’ (financial, manufactured, intellectual, human, societal and environmental capitals). As such integrated reporting represents a stakeholder management model already integrated – at least on the text level – in many corporate governance codes, just enlarging the concept of capital providers from shareholders only to other internal stakeholders, and the goal of capital efficiency and profit maximisation from financial capital only to other five forms of internal capital provisions. It is also a new step in the development of social and environmental accounting and reporting, rooting from the 1970s and sustainability reporting from the 1990s. The concept of a ‘business model’ represents the way how an organisation creates value, comprising all its activities, its relationships with stakeholders and its tangible and intangible assets and liabilities, and finally the boards responsibilities, as for the board, ‘corporate governance’ and sustaining and developing the company’s business model are essentially the same thing. In the end of the day, it is a question what kind of ‘business model’ integrated reporting based corporate governance really reflects, and how it possible varies from shareholder-centred business model. The purpose of this paper is to test (1) what kind of stakeholder model, if any, integrated reporting and especially International <IR> Framework represents, (2) what is the impact, if any, of integrated reporting to material corporate governance in the codes it is included in, and (3) if yes, does an integrated view and especially the ‘integrated thinking’ behind International <IR> Framework represent a genuine sustainable value creation driven business model based on the boundaries of the planet and social foundation for the humanity, or is it only a view to encourage organisations to take care of the profits of the specific capital providers.

Calls are repeatedly made on corporations to respond to the challenges facing the planet from a sustainable development perspective and governments take solace in the idea that corporations' transparency on their corporate activity in relation to sustainability through voluntary reporting is adequately addressing the problem. In practice, however, reporting is failing to deliver truly sustainable results. The article considers the following questions: how does the varied reporting landscape in the field of non-financial reporting impede the objectives of fostering corporations' sustainable practices and which initiative, among the options available, may best meet the sustainability objectives after a decluttering of the landscape takes place? The article argues that the varied corporate reporting landscape constitutes a key obstacle to fostering sustainable corporate behaviour, insofar as the flexible and please all approach followed in the context of corporate sustainability reporting offers little to no real incentive to companies to behave more sustainably and ultimately pleases none in the long run. The case made is that “ less is more” in non-financial reporting initiatives and hence the article calls for a revision of key aspects of the European Non-Financial Reporting Directive, which, as is argued, is more likely to achieve the furtherance of sustainable corporate behaviour. Although the different reporting requirements offer the benefits of focussing on different corporate goals and activities, targeting different audiences and allowing for a level of flexibility that respects the individual risks to sustainability associated with each industry, the end result is a landscape that lacks overall consistency and comparability of measurements and accountabilities, making accountability more, rather than less, difficult to achieve. The article acknowledges the existence of several variances relating to the notion of sustainability per se , which continues to remain a contested concept and variances between companies and industries in relation to how each is operating sustainably or unsustainably respectively. Such variances have so far inhibited the legislator from easily outlining through tailored legislation the individual risks to global sustainability in an all-encompassing manner. The end product is a chaotic system of financial reporting, CSR reporting, non-financial reporting and integrated reporting and little progress to increase comparability and credibility in order for companies to be held accountable and to behave in ways that do not harm the planet. A “clean up” of the varied initiatives in the terrain of non-financial reporting is recommended.

There is a broad call to integrate planetary boundaries and life-cycle based reporting into accounting theory and reporting standards. Although many practitioners back this call, including insurers, shareholders with a long-term orientation, and company law specialists who suggest that the inclusion of long-term stakeholder interests is necessary to counter both corporate and systemic risks, it remains unanswered. We argue that dominant assumptions about the status and architecture of corporations in corporate governance theory stand at the centre of this unanswered call in accounting theory and practice. As the status of the public corporation is interpreted as a nexus of contracts and its architecture as a restricted dyadic relation between ‘principals’ and ‘agents’, the object and audience for corporate reports are restricted to a very specific set of actors, interests and time-horizons. We argue that this conceptual setup unduly restricts notions of accountability and is connected to a specific notion of political economy. A broadening of reporting standards needs, therefore, to be accompanied by a critical assessment of the assumed object and audience of reporting in corporate governance theory.

Inspired by the principles of sustainable finance and Environmental, Social and Governance (ESG) reporting, the European Union Directive 95/2014 on non-financial disclosure recognized that metrics and more transparency would foster internal debates, ensuring proper governance and helping to promote dialogue between management, the board and stakeholders, including civil society and non-governmental organizations (NGOs). Although significant academic attention has been paid to the -limited- space that the third sector had in the definition of the content of the Directive, not enough has been said on the way in which the Directive and ESG reporting can be leveraged by non-financial actors and what are the consequences of embracing accounting, non-financial reporting and corporate governance as tools for campaigning. This paper tries to fill the gap and asks some direct questions: are the Directive and the EU approach to sustainable finance opening spaces of engagement and confrontation that contribute to a true transition into a socially and environmentally sustainable future? Is the encounter between the financial realm and civil society a real win-win in the best interest of future generations and the planet? After presenting the background of the Directive and the three main opportunities that the ESG framework presents for civil society engagement, we conclude with a critical reflection on what is lost when civil society sits around the same table as financial institutions, uses their vocabulary and accepts that the conversation can only happen around those social and environmental causes that are financially material.

Regulations addressing corporate reporting in the United Kingdom require reporting entities to disclose their business model in their Strategic Report. The business model is intended as the organising concept for the non-financial disclosures, with its principal role being to explain how the reporting entity creates value for stakeholders. The business model concept has become a pervasive concept for corporate reporting with global organisations such as the IIRC, AICPA and IFAC emphasising it central role in external reporting. Using interviews conducted with FTSE 350 company executives and others in the reporting ecosystem, this paper analyses the extent to which responses from the interviewees align with the economic and strategic management literature framing the conceptualisation of business models. It is argued in this paper that there is a powerful preformative aspect to business model reporting. It does not strengthen accountability but serves a different purpose: to colonise new arenas of value by installing unstable concepts like purpose, value and stakeholders. These business model disclosures obfuscate and provide an opportunity for managers to construct narratives that are untethered from the financial statements to create stories without numbers. This ‘reinvention’ of capitalism is more a recasting of old principles rather than ushering an era of a more enlightened view of the corporation. It is a salutary reminder that regulation of corporate reporting does not necessarily lead to improved accountability.