The days of believing that a company's profit and loss account is the ultimate indicator of future performance are over. Investors, regulators, and other stakeholders are acutely aware that there is much more information that a company can disclose outside of the usual financial reporting. This nonfinancial data can provide a better understanding of the business' long-term risks as well as how those risks are managed.
Many companies fail to see--and leverage--the benefits that a better understanding of nonfinancial risks can have on the long-term viability of their business, known as corporate sustainability. Instead, companies either choose to ignore investor and regulatory demands for more information or pay lip service to them, regarding such requests as box-ticking compliance exercises instead of opportunities to understand, manage, and exploit nonfinancial risks for their future benefit.
Standards and frameworks have been developed worldwide to help organizations examine and understand the impact of environmental, social, governance (ESG), and other long-term risks to the business, and how they can recognize--and realize--opportunities stemming from them. In 2011, the Sustainability Accounting Standards Board (SASB) was set up to provide "an expanded accounting language that communicates what yesterday's performance means for tomorrow's prospects." The SASB has attempted to make such disclosure easier for companies, even having developed specific standards for 77 different industries so that companies can more easily identify ESG issues that are most likely to be financially material in a given industry.
Internal Auditor spoke to Jeffrey Hales, chair of the SASB Standards Board and sector chair for Financials and Renewable Resources and Alternative Energy and the Charles T. Zlatkovich Centennial Professor of Accounting at the University of Texas at Austin, about the benefits for companies --and stakeholders--of digging deeper into nonfinancial risks, and what role internal audit should play in the process.
Are companies seeing the value of nonfinancial reporting measures?
Good financial reporting is important, but I also recognize the limitations of traditional accounting. Now there is so much more information that can be drawn from to get a better understanding of corporate strategy and performance than just numbers relating to assets and liabilities. Over the past five years there has been a significant drive by investors demanding more information about companies' long-term goals and strategies, and how these organizations are assessing, preparing for, and mitigating long-term risks such as climate change. If investors think this information is important, then companies are far more likely to engage and align their reporting with investor expectations. And as soon as some leading companies make this move--and many have--more will follow.
Which industries/types of companies are the best adopters of the Standards and are living up to their spirit? Similarly, which industries are lagging?
Carbon- and energy-intensive industries--such as oil and gas, mining, and infrastructure companies--have been among the best early adopters of the SASB and other sustainability standards. This is partly because they were the first industries to come under closer investor scrutiny regarding the impact they were having...