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Towards the end of the 20th century, the limited liability company was using natural assets faster than nature was regenerating them — clearly not a sustainable matter. By 1997, it became apparent that the makeup of the market capitalization of some iconic companies was changing as a result. As we turned into the 21st, century only about 20 percent of the makeup of the market cap was reflected as additives in a balance sheet according to financial reporting standards. This led to the drafting of guidelines by the Global Reporting Initiative (GRI) to guide corporations, and other organizations, on how to report on these “incorporeals,” intangibles, and sustainability issues — also called environment, social, and governance (ESG) issues.

Impacts on duties of accountability

When I was Chairman of the United Nations Committee on Governance and Oversight and Chairman of the GRI, IFAC held a meeting at the United Nations. We discussed how directors were not discharging their duties of accountability in the following cases:

  • annual reports consisting of only financial statements that did not reflect the make-up of the market cap; and
  • financial statements and reporting on the impacts of the company on the economy, society and the environment that was divorced from reality as these things work together, not in silos.

The discussions then started about connecting or integrating this information.

The group had to settle on a term: “Connected Reporting” or “Integrated Reporting”? The etymology of the word “connecting” is link, and the etymology of the word “integrating” is system. It was therefore argued that the term “Integrated Reporting” would better reflect what was required. This led to the GRI and Accounting for Sustainability (A4S) launching the International Integrated Reporting Council (IIRC), of which I became the  Chairman.

The start of Integrated Reporting

In 2009, as Chairman of the King Committee on corporate governance in South Africa, we recommended that South Africa should follow an approach of integrated reports and drafted a framework for such a report. The Johannesburg Stock Exchange agreed and made integrated reporting a listing requirement. The IIRC used this as the basis on which to develop the <IR> Framework which has become well known as the International Integrated Reporting Framework. This was the start of integrating financial and non-financial information.

“Inside-out” and “outside-in

Importantly though, we were still looking at sustainability from the ‘inside-out’ — the impact of the company and its products on the economy, society, and the environment. Meanwhile there were some seismic events, such as the collapse of Lehman Brothers, which showed the impacts external factors could have on the company. These events launched the Sustainability Accounting Standards Board (SASB). SASB started looking at sustainability from the “outside-in” — that is, from the perspective of the impacts of the Brundtland Commission’s three critical dimensions for sustainable development (people, planet, and prosperity) on the company itself. We saw that sustainability, like a coin, had two sides.

A myriad of standards developed and are now consolidating

Thereafter a myriad of framework providers and standard setters leaped into this ESG space. I gave a talk in London where I said that it was a moral and social outrage that standard setters saw themselves as competitors when they all should have the same outcome in mind – namely, a global and comprehensive corporate reporting system. I said we needed some consistency in this reporting rather than the clutter and confusion which was being created for preparers and users. I am told that this had some effect and soon the Group of Five, which included the IIRC and SASB, issued a statement of intent to collaborate. Inevitably, collaboration led to talks of merger and SASB and the IIRC merged to create the Value Reporting Foundation (VRF). Further progress led to a ‘sale’ of the VRF to the IFRS Foundation (IFRS) and the SASB standards were pushed into a new body, the International Sustainability Standards Board (ISSB) under the oversight of the IFRS, a sibling to the International Accounting Standards Board (IASB). This is due for completion by the end of July 2022.

The positioning of Integrated Reporting Framework

The <IR> Framework, as a result, is being positioned within the IFRS Foundation. There is a problem with this because, although the IASB and ISSB have the authority to set standards and evolve, the IFRS Foundation does not have such powers:  it is positioned as a monitoring and oversight board under IOSCO. I speculate that the answer to this problem is for the IFRS to pass ownership of the <IR> Framework jointly to the IASB and ISSB to form a working group in regard to the <IR> Framework. This would be a baseline for the creation of the integration and connectivity of the financial and non-financial information. Meanwhile, the ISSB would issue baseline sustainability reporting disclosures on which different jurisdictions, using a building blocks approach, can add pertinent layers.

Common cause

The beginning of the end of clutter and confusion was the issuing of the statement of collaboration. We are creating large stepping-stones to cross from one side of the river — with corporate reporting’s clutter and confusion — to the other side — with a global, comprehensive corporate reporting system.

What is intriguing in the developing standards and regulations — the EU’s European Sustainability Reporting Standards (ESRS), China’s statements, the ISSB Standards, and the U.S. Securities and Exchange Commission’s regulations — is that there is common cause: a need for connectivity between financial and non-financial information. 

This article is adapted from the proceedings of the 7th Colloquium of the Good Governance Academy. The full colloquium memorandum can be found here.

Mervyn King

Mervyn King is a senior counsel and former Judge of the Supreme Court of South Africa. He is professor extraordinaire at the University of South Africa on Corporate Citizenship, honorary professor at the universities of Pretoria and Cape Town and a visiting professor at Rhodes.

He has honorary doctorates of law from the Universities of the Witwatersrand in South Africa and Leeds in the UK, an honorary doctorate from Deakin University, Melbourne, Australia and an honorary doctorate in commerce from Stellenbosch University in South Africa. He is chair emeritus of the King Committee on Corporate Governance in South Africa, which produced King I, II, III and IV, and chair of the Good Law Foundation.

He is also chair emeritus of the International Integrated Reporting Council (IIRC) in London and of the Global Reporting Initiative in Amsterdam and a member of the Private Sector Advisory Group to the World Bank on Corporate Governance. He chaired the United Nations Committee of Eminent persons on Governance and Oversight and was president of the Advertising Standards Authority for 15 years and a member of the ICC Court of Arbitration in Paris for seven years.