The evolving reporting ecosystem

One old friend, a veteran of climate change conferences, noticed what he thought was a really significant change this time around, at the Glasgow COP26 event.

It was sartorial. Previously, these gatherings have been packed, he said, with people in sweatshirts from non-governmental organisations. This time, there was a different feel. The finance and business community, often in suits, were out in force. It was not, as he emphasised, that the place was awash with greenwash. It was a genuine sign that there was more urgency in the air.

The world has tilted. Not by much as yet, but it has tilted. For all their bluster and exhortations, politicians’ influence and ability to get things done are on the wane. The infuriation at their short attention spans is peaking. The change that is required in everything from corporate governance to climate change is now being energised by global alliances rather than national governments.

Malign neglect

Corporate governance in the UK is a good example. The early days of the Cadbury Code provided an impetus to create and build on good practice. But now, through a period of careless, or perhaps malign, neglect, the changes promised in corporate governance and the regulatory bodies to oversee them are now wreckage on the battlefield.

The government bodies that ostensibly oversee the process are dithering. To say they are kicking the can down the road would be to malign small schoolboys who enjoy kicking a can along.

More is obviously needed on directors’ responsibility, for example. Instead of backing the efforts to ensure that corporate executives publicly declare that they are responsible for corporate disclosure, the identification of risks and the integrity of corporate information, the likelihood is that the burden will instead be minimised. The existing sections of company law need to be strengthened and directors put on the spot.

SOX red herring

Instead, the red herring of the Sarbanes-Oxley system that was implemented in the US after the Enron scandal is being promoted again. In the aftermath of Enron, I sat through umpteen seminars where US lawyers went through the mind-numbing detail that they insisted would make the system and the risks safe.

The lawyer-led culture of the US never leads to solutions, only to process. As someone pointed out only the other day, the accountants checking the work done earned more than the poor old corporate staff trying to implement it. The US retreat to box-ticking was complete, and the auditors were left exposed.

It is small wonder that the business world, equally exposed by the lack of ability or understanding on the government’s side, is trying to sort out its own solutions with a growing feeling of urgency. We may finish up with very weak, centrally enforced rules from government, but the private sector will gradually bring about the culture change required.

In business, enlightened companies will hire outside assessors to provide assurance on financial reporting areas, just as private sector bodies and firms do in the financial reporting of climate-related measures.

Corporate disclosure culture could shift to two speeds. There will be the bog-standard stuff that feeble government rules would foster, and the stuff that enlightened companies would want to get out there into higher echelons of the investor/sustainability/disclosure world.

Erasing differences

This mirrors what is happening on the climate change side. Change is being brought about on a broad front and not on narrow partisan efforts. The national differences are being erased in the wider effort.

In a sense, this has been happening all along when it comes to the concept of financial disclosure driving behavioural change. The creation of the Prince of Wales Accounting for Sustainability initiative in 2004 drove the creation of the International Integrated Reporting Council in 2009, which in turn spawned the idea of the Task Force on Climate-related Financial Disclosure in 2013.

And now, at COP26, a similar series of non-governmental manoeuvres looks to have achieved the impossible by putting together all manner of bodies, from sustainability standards to financial reporting standards and bringing in many other groupings to cover virtually all of the waterfront.

We will have, as someone put it, a corporate reporting ecosystem. And it will be larger and more comprehensive and capable of rolling rapid change forward than anything any politicians could have dreamt of.