Robert G. Eccles is Visiting Professor of Management Practice, and Kazbi Soonawalla is a Senior Research Fellow in Accounting at Oxford University Said Business School. This post is it is based on the second part of a three-part series on financial reporting by Professor Eccles and Dr. Soonawalla.
In The Long and Winding Road to Financial Reporting Standards we reviewed the history of how accounting standards came to exist in the U.S. as Generally Accepted Accounting Principles (U.S. GAAP) issued by the Financial Accounting Standards Board (FASB) and international Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). We showed that it took years and was simultaneously tedious and contentious. Such is the world of standard setting of any kind. Here we examine the state of financial reporting standards today to draw some lessons for the work of the International Sustainability Standards Board (ISSB) which has just begun.
As our previous piece made clear, standards are social constructs, not something grounded in the laws of physics. While there may be technically worse answers there is never a single “scientifically correct” one. Standards enable and influence the dialogue between the companies who use them for reporting and investors who use the reported information for decision making. Human judgement and compromises are involved. The process takes place in a broader regulatory context which is itself nested in a political context of competing interests.
People who are unfamiliar with financial reporting assume it’s all pretty cut and dried. Their belief is that the clear standards which have been around for decades make it easy for companies to know how to report and straightforward for auditors to know how to audit. Most of all they assume that reported figures like revenue, profit, liabilities, and assets are absolute, and that a true and calculable measure of company “value” exists.
The Proposed SEC Climate Disclosure Rule: A Comment from Norges Bank Investment Management
More from: Carine Smith Ihenacho, Severine Neervoort, Snorre Gjerde, Wilhelm Mohn, Norges Bank
Carine Smith Ihenacho is Chief Governance and Compliance Officer and Severine Neervoort is Senior Analyst, Corporate Governance at Norges Bank Investment Management. This post is based on a comment letter submitted to the SEC regarding the Proposed SEC Climate Disclosure Rule by Norges Bank Investment Management, authored by Ms. Ihenacho; Ms. Neervoort; Snorre Gjerde, Interim Head of Environmental Initiatives; and Wilhelm Mohn, Global Head of Corporate Governance.
Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value add Value (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here), both by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy – A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).
On 17 June 2022, Norges Bank Investment Management (NBIM) responded to the Securities and Exchange Commission (SEC)’s consultation on proposed rules to enhance and standardise climate-related disclosures for investors.
NBIM is the investment management division of the Norwegian Central Bank and is responsible for investing the Norwegian Government Pension Fund Global. We work to safeguard and build financial wealth for future generations. We are a globally diversified investor, with approximately USD 404 bn invested in listed equities and USD 137 bn in fixed income in the United States.
Climate change may give rise to transition and physical risks, as well as opportunities for companies. How these are managed may impact their financial performance and thereby our long-term returns as a shareholder. Therefore, we expect companies to report on their exposure to climate-related risks and opportunities, how these are managed, and relevant performance metrics. We expect companies to disclose a strategy and implementation plan to address these risks, and to report on progress towards such plans.
We welcome the Commission’s proposed rules, which we believe will lead to more consistent, comparable, and reliable climate-related reporting from companies, and thereby help investors get a better picture of companies’ value. Better sustainability reporting can also contribute to well-functioning and efficient markets. Corporate disclosure increases market efficiency, and sustainability reporting has been associated with more accurate analyst forecasts and lower costs of capital for disclosing firms.
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