A coalition of sustainability reporting organizations said in a recent paper that information relating to a company's environmental, social and governance-related (ESG) impacts is economically relevant and therefore could theoretically fit within the same space as more mundane financial reporting and disclosure.

The organizations—the Global Reporting Initiative (GRI), the Carbon Disclosure Project (CDP), the Climate Disclosure Standards Board (CDSB), the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC—released the paper as part of ongoing efforts, announced in September, to cut through the confusion that surrounds the disparate ESG bodies by developing a comprehensive reporting system that properly accounts for sustainability-related maters.

The coalition, according to its September paper, views itself as a player in a "nested" ecosystem with layered concepts of materiality. Key to this conception is to differentiate "sustainability," which is concerned with a firm's impact on wider civil society, from "enterprise value," which is concerned mainly with how ESG factors can play into a company's economic health. While the two can carry significant overlap, organizations such as the GRI tend to be viewed as more involved with former, while organizations such as the SASB and IIRC tend to be viewed as more involved with the latter. Rather than seeing these two views as irreconcilable, though, the coalition said they can work together for different needs, and so they stressed the need for "interoperability" as a goal.

Their idea of interoperating systems of reporting resembles a funnel that gets narrower with successive steps. At the top is reporting that reflects all significant impacts that typically address the broadest range of sustainability matters; this generally is the domain of sustainability reporting. After that is reporting on enterprise value, which typically would address a narrower range of sustainability matters considered sufficiently likely to influence enterprise value via a company's positive and negative externalities. Finally, there is reporting that relates directly to monetary amounts recognized in the financial statement, which would address "the narrowest range of sustainability matters," namely the ones that have a direct quantifiable dollars-and-cents impact on the firm for the reported period.

"For example, carbon emissions enter the big lens perspective as society becomes aware of global warming, the middle lens as investors start to factor net zero transition into capital market pricing, and the small lens as financial consequences are felt in net asset values," said the paper.

These three layers are meant to work together so that companies can collect information about performance on a given sustainability matter once, and can use that same information to serve different objectives, when the information is suitable for the needs of those different objectives.

For instance, a company reporting on nitrogen oxide emissions (which cause air pollution) would, at the sustainability level, collect and disclose information such as the source of the emission factor, standards methodologies, assumptions and tools used to determine contribution (destruction) to sustainable development. Then, on the sustainability-related financial disclosure level, the same company could talk about trend and scenario analysis of nitrogen oxide pollution, including sales-weighted emission of nitrogen oxides for medium- and heavy- duty engines in order to understand business levers available to change emissions and the likely effect of improving performance on the company’s enterprise value by reducing or avoiding remediation expenses. Finally, on the purely accounting and financial disclosure end, the firm would report the monetary impact on the statement of profit or loss due to  remediation expenses related to nitrogen oxide air pollution regulation.

"The result of interoperability for this measure would be reduced confusion and cost for both producers and users of sustainability information, and would likely encourage companies to invest further in the robust controls and data systems necessary to ensure high-quality information comparable with traditional financial reporting," said the paper.

The way the paper outlines this process, it appears that the sustainability disclosures inform the enterprise value (or sustainability-related) report, which in turn informs the ESG factors that would be recorded in the financial accounting statement, creating an interdependent system among all layers.

To place sustainability-related information on the financial report would require cooperation from the International Accounting Standards Board (IASB), which recently expressed a desire to be more active in the sustainability space. The coalition argued that incorporating more ESG matters into the financial reporting space would provide better insight into drivers of long-term enterprise value and address "this gap in the corporate reporting system." It noted that the IASB has already done this to some degree. For example where climate-related risks could significantly affect the recoverable amount of a company’s assets, information about how the effect has been factored into recoverable amount calculations would be relevant for the users of financial statements.

"Our experience suggests that the IASB’s existing Conceptual Framework for Financial Reporting shares many common components with sustainability-related financial disclosures," said the paper, noting that while the board's conceptual framework would need some adjustment, it would bring about a greater understanding of what drives value in today's economy.

To illustrate, the report also included a prototype standard for climate-related disclosures, which covers topics such as governance, strategy, business model, outlook, risk management and metrics and targets.