Accounting, reporting, and disclosure standards are not one and the same thing. If today we have financial accounting and financial reporting standards, as well as financial disclosure standards, we have only recently witnessed adoption of sustainability reporting and disclosure standards. However, we do not have specific sustainability accounting standards notwithstanding the arguments that the IFRS standards technically suffice.

What are the differences?

• Accounting standards prescribe how to measure things.
• Reporting standards prescribe how to present things that are measured (or unmeasurable).
• Disclosure standards prescribe things to disclose publicly, which are typically defined by a regulatory body.

In accounting standards, measurements may allow for options, but these are known and fixed. In other words, once you choose a measurement option, you must continue using the same.

A good example is the accounting standard to count inventory, for which two methods are allowed: first-in-first-out and weighted average cost (note that the last-in-first-out method is prohibited under IFRS but allowed under US GAAP). Once the company chooses its allowable method, it must apply it consistently thereafter.

In sustainability, measurements are generally not yet consistently defined, or when they are, they may vary from one set of standards to another and are not yet universally agreed upon. This results in performance measures, and therefore data, that may not be easily comparable.

A good example is the counting of full time equivalent (FTE) employees. Every company has an FTE number, but it seems every company has a different way of measuring or counting an FTE. While most sustainability reporting or disclosure standards require this number be disclosed, few prescribe how to define and count it. An accounting standard would tell you the “x” number of ways to calculate this number.

It may take time before we have sustainability accounting standards that produce truly comparable sustainability performance disclosures. In the interim it is important to disclose both the FTE number and calculation methodology thereby allowing users to compare across companies.

The best advice in sustainability reporting is to start somewhere and use what you have. Some disclosures are better than none, and we are collectively taking the first steps on a longer journey of change where sustainability disclosures will ultimately be on par with financial disclosures.

Sustainability accounting standards may finally bring into focus the use of measures for true context-based and absolute sustainability performance, such as the UNRISD’s Sustainable Development Performance Indicators.

Connecting sustainability and finance

Understanding the differences between measuring, reporting, and disclosing performance is the key to connecting sustainability and finance. This understanding helps to determine where different types of information will be disclosed.

Users of sustainability disclosures are demanding a relevant and clear connection between sustainability and financial performance, which companies would do well to provide. Better disclosures lead to more efficient markets and high-quality disclosures enjoy many benefits, including a lower cost of capital.

This need for connectivity is driving greater interaction and collaboration between the sustainability and finance departments. It is necessarily pulling the Chief Financial Officer (CFO) into the decision-making process as an essential contributor to support the identification of material issues and implement management programs and initiatives. The sooner this happens the better.

In the adoption of this holistic approach, companies can make the most of the financial consequences of their sustainability performance, create financial value, build long-term resilience, and strengthen reputational capital. Sustainability can ultimately become meaningfully and profitably embedded within their strategy and operating business model.