Navigating the Divide: The Imperative of Aligning International Accounting and Sustainability Standards

Since its inception in 2001, the International Financial Reporting Standards (IFRS) have aimed to facilitate international capital formation by fostering enhanced transparency, accountability and efficiency across financial markets. The institution responsible for setting these standards, the International Accounting Standards Board (IASB), as well as its U.S. equivalent the Financial Accounting Standards Board (FASB), are fundamentally inclined to sustain market confidence, a lack of which instigated the collapse responsible for the Security and Exchange Commission’s (SEC) formation in 1933. Despite sharing common goals with the IASB, however, the FASB has remained autonomous, influencing not only the standardisation of global financial accounting practices, but also the advancement of non-financial reporting frameworks.        

The state of financial reporting today reflects decades of co-operation between the US and international accounting institutions. Formally recognised as a non-voting observer to the IASB’s predecessor in 1988, the FASB has maintained a commitment to the ‘internationalisation of standards’ as the basis of efficient international capital formation and transaction. The urgency for aligned standards gained momentum in the 1990s, when the Asian Financial Crisis highlighted the need for integrated standards to assess capital inflows and outflows, the imbalancing of which caused many macroeconomic issues for Asian economies at the time. Following the 2002 Norwalk Agreement, the FASB and IASB further harmonised standards for the sake of interoperability, prefacing the establishment of yet more collaborative assessment structures, such as The National Standards Setters (NSS). In spite of this ongoing convergence, the US has remained exogenous to the 144 jurisdictions who have adopted the IFRS, sustaining key conceptual and technical differences. The most important of these differences is what the SEC terms ‘level of authority’. Whilst the IFRS uses a principles-based approach, the FASB’s Generally Accepted Accounting Principles (GAAP) employ rules-based regulation. This divergence takes shape as alternative definitions for assets and liabilities, as well as alternative inventory practices. 

This lack of standardisation has significant implications for the respective sustainability approaches employed by the FASB and the IASB. Although both institutions registered their interest in a unified approach to ESG reporting, there remains a discord in their sustainability assurance frameworks (the ISSB Standards and Accounting for Environmental Credit Programmes), restraining interoperability across the jurisdictional divide. The SEC Chair Gary Gensler identified this inconsistency as a risk factor during 2021’s London City Week, emphasising the need for uniform, comparable financial reporting methods to protect investors and promote sustainable capital formation. Gensler’s remark directly addressed investor demands for comparability and credibility, triggered by fears of market destabilisation caused by a maze of inconsistent, complex, and often arduous disclosure requirements, both voluntary and mandatory.

Despite the initial expenses and technical adjustments, key stakeholders, including corporate managers, accountants, and capital market players, stand to enjoy substantial cost savings through enhanced consistency and comparability — a value proposition that hesitant US corporations should not overlook. Moreover, the removal of cross-border regulatory hurdles could significantly expedite the integration of sustainability criteria, such as climate risk mitigation, into international accounting standards. Such integration could manifest in various ways, from the incorporation of environmental cost-benefit analyses into asset retirement planning to expanded stakeholder engagement processes and mandatory carbon offsetting and reporting practices. As such, the harmonisation of accounting standards emerges as a prerequisite for the evolution of sustainable finance, rather than an afterthought. 

Benefits aside, a variety of barriers continue to obstruct both the convergence of financial- and non-financial accounting standards, despite escalating pressure on global financial regulators and standards setters. Indeed, successful convergence first requires an understanding of the current failings of voluntary disclosure frameworks, such as those offered by the ISSB. Additionally, greater regional outreach and consultation appear critical, with the Taskforce for Climate Related Financial Disclosures (TCFD) setting a distinct benchmark for best practices in ESG reporting through its incorporation of regional perspectives. Though hardly a novel proposition, sectoral nuances also represent an area worthy of consideration, requiring customised reporting processes across different industries. Lastly, overcoming scepticism amongst US asset managers will be key for proficient ESG integration into global corporate financial reporting, given their extensive influence and market presence.

In summary, the integration of sustainability within international accounting standards is fundamental to the broader development of ESG. The complexity of today’s environmental challenges requires a degree of consistency and comparability currently absent from international accounting and sustainable finance paradigms. These challenges, although significant, can be effectively addressed through greater collaboration among global stakeholders, including regulatory bodies, industry associations, and investor groups. Such efforts will be essential for developing universally applicable and cost-effective ESG disclosure standards, thereby advancing global support for ESG principles and bolstering sustainable capital formation.