6th video Flashcards
Sustainability reporting .108
Sustainability reporting:
* the measurement, disclosure, and communication of information about ESG and sustainability topics, including activities, risks and policies
Prepared by sustainability managers. Issuers of securities/firms
Sustainability reporting standards .108
- a mandate for reporting on ESG or sustainability issues (e.g., a requirement to follow a specific set of reporting standards/law)
- Standards that govern how to report and disclose ESG information (preparation and what to include)
1) standards/law
2) preparation and what to include
Where do firms typically report on sustainability? .109
—Annual reports (called integrated report, which presents both financial and non-financial information)
—Also in separate sustainability reports
What kind of information is typically reported in sustainability reports? Is the info assured by third parties?
- Sustainability reports (or the relevant sections in the annual report) contain a broad range of qualitative and quantitative, but not necessarily monetary information
+ - Firms can seek an auditor, consultant, or another external assurance provider to certify their sustainability reports and disclosures (Just like annual reports. Big 4 can help assure the standards)
Two approaches to sustainability reporting co-exist
—Narrow approach (Give investors what they want)
Only sustainability information that is financial material to investors is deemed important and should be reported. Where sustainability risks are included.
—Broad approach (drive change via reporting).
Expands the scope and target audience of sustainability reporting and provides information that is relevant (or material) to a diverse set of stakeholders (e.g, consumers, employees, local communities, environment)
Under this stakeholder-oriented approach, firms also report information about their impacts on the environment and society, irrespective of whether these impacts have financially material consequences for the firm
Idea is that reporting and the resulting transparency are change agents, incentivizing desirable behaviors and discouraging undesirables ones
Singel vs double materiality? .112
Broad and narrow view can also be thought of in terms of “single” and “double” materiality
- Single materiality
* narrow approach to ESG reporting that focuses on issues relevant to investors and financial materiality - Double materiality
* broad approach
* applies double materiality (financial and impact materiality) as the key criterion
* a firm reports on how it
* is affected by ESG issues financially [financial materiality]
* impacts the environment and society, including the externalities it causes [impact materiality]
* By definition, the externalities are not borne by the firm (and therefore may not be material to investors).
7 Key features of sustainability reporting! 114.115
- Diversity of users and uses
Some users might have little experience with disclosure documents - Diversity of topics
Thus hard to standardize topics - Diversity of objectives
In contrast to financial reporting, sustainability reporting responds to a wider range of interest and preferences.
Interest and objectives quickly change over time (due to what is happening in the world) - Diversity in measurement
Sustainability activities result in observable and measurable outcomes. Issues not necessarily measured in monetary terms
Also:
- Voluntary nature of sustainability activities
- Long term horizon
- Central role of externalities
What does accounting research tell us about the costs of financial disclosure?
3 direct and 3 indirect costs
———Direct costs
* Preparation
* Dissemination
the action or fact of spreading something, especially information, widely.
* Certification
——-Indirect costs
* Proprietary costs: because multiple audiences (e.g., competitors, suppliers, labor unions, etc.) can use the information. They can start bargaining
* Litigation costs: too optimistic forward looking disclosures might result in law suits
* Real effects: if firms manage required disclosures trough real actions and when disclosures poorly measure the quality of the underlying actions
What does accounting research tell us about the benefits of financial disclosure?
- Mitigate information asymmetries between firms and investors
* Reduce adverse selection and levels playing field btw. investors
* Increase liquidity
* Lower required return by investors - Facilitate investors’ ability to predict future cash flows and co-variances btw.
cash flows
* resulting in lower cost of capital - Increase investor awareness and willingness to hold securities
* Improving risk sharing - Facilitate monitoring of managers by outsiders (e.g., analysts, institutional investors)
* Improving corporate decision making and leading to more efficient investment - Provide useful information about other firms in the form of information spillovers and transfers
Difference-in-difference analysis?
Research method, statistical method, to assess the impact of a policy, treatment, intervention, over time.
Treatment group vs control group (not affected)
!!! Krueger 2023 paper, mandatory ESG disclosure in Treatment group vs control group (not affected) leads to:
a)bid-ask spread decreases by 8.4% (when you do stock trading, there is a price of buying and selling. The wider the difference, the more illiquid the stock. In liquid stock, with many buyers and sellers, the bid-ask price is very small)
b)AMIHUD measure decreases by 16% (Absolute return of a day/stock trading volume)
3)zero-return days decline by about 3 trading days per year
- A summary illiquidity measures decreases by 0.085 or 9% of a standard deviation (0.902)
!!!Significantly positive effect of ESG disclosure of firm-level stock liquidity (when a firm is liquid, you can trade a lot of that stock without moving prices much)
!!The effects are strongest if the disclosure requirements are
* implemented by government institutions ( tock ed cranen
* not on a comply-or-explain basis
* coupled with strong enforcement by informal institutions.
* In addition, firms with weaker information environments (who didn’t have any ESG disclosure) benefit the most from ESG disclosure mandates.
* Overall conclusion: ESG disclosure regulation improves the information environment and has beneficial capital market effects
Numerous different organizations offer mainly voluntary reporting standards and frameworks for ESG activities that aim to improve or harmonize reporting practices:
IFRS (international financial reporting standards) Foundation is consolidating different sustainability reporting standards setters!!!:
SASB (sustainability accounting standards board): industry-specific disclosure standards across financially material environmental, social and governance topics that firms could use in SEC filings
* GRI (Global Reporting Initiative): helps companies communicate their impact on sustainability issues by offering global standards for sustainability reporting
* TCFD (Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosure: framework for climate related disclosures
* CDSB (Climate Disclosure Standards Board)
EFRAG?
EFRAG (European Financial Reporting Advisory Group):
* private association that develops and promotes European views assuring that European interests are properly considered in the
IASB standard setting process
* Developed the European Sustainability Reporting Standards (ESRS)
* Draft released in November 2022
* Formally adopted by EU commission on 31/07/2023
IFRS?
The IFRS (International Financial Reporting Standards)
Foundation:
* a nonprofit accounting organization
* Financial Reporting Standards through the internationanal
Accounting Standards Board (IASB)
* IFRS (with IASB and the International Sustainability Standards Board (ISSB)) developed a first set of sustainability standards
* Released on 26/06/2023
The European Sustainability Reporting
Standards (ESRS)?
12 standards covering a variety of ESG themes
* Mandatory under CSRD
* Double materiality
* Applies to all large listed and unlisted companies that meet at least two of the following criteria (there are some exceptions):
a) Balance sheet total of more than €20m
b) Net turnover of more than €40m
c) Average number of employees during the financial year of more than 250
*Compliance with the new reporting regulations will be phased in over time, dependent on the profile of the organisation:
* Earliest compliance: January 2024
apply to all sectors
ESRS applies double materiality requirement to disclosure
* Impact materiality: “A sustainability matter is material from an impact perspective when it pertains to the undertaking’s material actual or potential, positive or negative impacts on people or the environment over the short, medium- and long-term time horizons.”
* Financial materiality: “A sustainability matter is material from a + financial perspective if it triggers or may trigger material financial effects on the undertaking.
