How Far Should Disclosure Go?
Last month we saw two speeches from either side of the Atlantic offering very different views for the future of financial reporting.
Financial reporting has traditionally been just that – financial. It has a long history, as investors have always needed this critical information to (hopefully) allocate their capital effectively. However, in the information age when digital capabilities make reporting easier, cheaper and more accessible than ever, should companies be going beyond merely financial reporting?
SEC Commissioner Hester M. Peirce says no. Peirce dismisses the call to realign the boundaries of what should be disclosed, arguing that with the high cost of disclosure only information that is ‘economically material’ should be reported. She is also concerned that soft ESG issues (environmental, social and governance), are not as reliable or easily standardised as financial information, and is worried that widening reporting remits will undermine the time-tested financial reporting system with unauditable information.
However, with a looming climate crisis there is a strong argument that sticking to time-tested paths is no longer an option. Mark Carney, Governor of the Bank of England, suggests an alternative vision for the future of financial reporting.
Carney highlights how environmental risks are increasingly economically material; with rising economy-transition risks combined with prospective climate risks threatening financial stability. Financial risks from climate change are significant – weather related insurance losses were around $140 billion in 2017 alone. The PRA released a draft supervisory statement in October outlining expectations for firms to manage climate change risks – including their disclosure expectations.
Getting climate change disclosure right means investment can flow to firms managing the risks and seizing the opportunities of a transition to a low carbon economy.
Although ESG disclosure is, at the moment, often contradictory and confused, the potential for structured data to cut costs, standardise and make information digitally accessible and comparable means that essential ESG information is becoming increasingly effective.