On December 11, 2018, a debate will be held at the Oxford Union regarding the “Motion: This House believes that corporate sustainability reporting should be mandated, and standardised by FASB and IASB, for it to be most useful for investors.” It will be chaired by Lady Lynn Forester de Rothschild. In proposition are Paul Druckman, Ian Mackintosh, Sir Callum McCarthy, and Anne Simpson. In opposition are Jonathan Bailey, Bob Herz, Harvey Pitt, and Tom Quaadman. The debate is free and open to the public as space permits.

As preparation for this debate, Professor Richard Barker, head of the accounting department at the Said Business School, Oxford University, and I have written a “Green Paper” titled “Should FASB and IASB be responsible for setting standards for nonfinancial information?” The Oxford English Dictionary definition of a Green Paper is “(in the U.K.) a preliminary report of government proposals published to stimulate discussion, from which statements of policy and proposals for legislative change emerge in the form of a White Paper.” In other words, this paper doesn’t take a position one way or the other. We simply lay out the arguments pro and con for these financial accounting standard setters to have the responsibility for setting standards for a company’s environmental, social, and governance (ESG)—often referred to as “nonfinancial”—performance. The alternative to this regulatory solution to achieving standards for measuring and reporting on nonfinancial information is to let market forces decide if such standards are desirable and, if so, how to develop them.

I will briefly review the pros and cons of a regulatory solution and suggest just one of many paths for a market solution, but first a bit of history to set some context. We take financial accounting and reporting requirement standards for granted. They form part of the essential plumbing of today’s capital markets. Every listed company needs to conform to some set of accounting standards which are used for mandated financial reporting. In the U.S., Generally Accepted Accounting Principles (U.S. GAAP) are set by the Financial Accounting Standards Board (FASB). Most of the rest of the world uses International Financial Reporting Standards (IFRS), or something very similar, which are set by the International Accounting Standards Board (IASB). Independent accounting firms perform audits to ensure these standards and reporting requirements are being properly met. These firms, in turn, have their work overseen by various regulatory bodies. We wouldn’t have the deep and liquid capital markets we have today without financial accounting standards and reporting requirements.

Industrial pipes and industrial pump. (Getty Royalty Free)

We take this plumbing infrastructure for granted. Yet it didn’t always exist. The journey to financial accounting standards and reporting requirements in the U.S. began with the formation of the Securities and Exchange Commission (SEC) following the Crash of 1929 which instigated the Great Depression of the 1930s. The SEC was formed to protect investors through corporate transparency of relevant and reliable information on their financial performance so that shareholders could make informed investment decisions. Similarly, other countries developed their own version of accounting standards, but these “Country GAAPs” have largely been replaced by IFRS.

Today investors are increasingly concerned with nonfinancial information as evidence mounts that a company’s good performance on material ESG issues contributes to good financial performance. But it is a bit of a “Wild West” when it comes to getting information on nonfinancial performance. Investors are faced with a bewildering array of data vendors providing nonfinancial information through various methodologies and NGOs attempting to develop standards for nonfinancial information (none of which have government support for any country in the world). The “Green Paper” reviews these well-meaning efforts which, in the aggregate, are creating more confusion than clarity. Data vendors often end up with very different rankings of the same company, with the social origins of these vendors being one reason for this. The Impact Management Project (IMP) is working to align many of the efforts in the NGO world.

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