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Commissioners Peirce and Uyeda recently commented on the May 2022 Strategic Plan Draft for Public Comment (“Draft Plan”) of the Financial Accounting Foundation (“FAF”) – the independent organization responsible for the oversight, administration, financing, and appointment of the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB). FASB in turn establishes US financial accounting standards for public and private corporate reporting to the SEC.

The Commissioners

…urge the FAF to approach with care Goal #6: ‘Engage with stakeholders, regulators, and Congress to determine the appropriate way, if any, for the organization to contribute to future sustainability reporting.’  Introducing sustainability standard-setting to the FAF runs the risk of degrading the independence and effectiveness that are the hallmarks of the FAF’s two standard-setting boards, the Financial Accounting Standards Board (‘FASB’) and the Governmental Accounting Standards Board (‘GASB’)….

The FAF’s interest in these conversations, therefore, is understandable, but should be tempered by an appreciation for the fundamental differences between accounting and sustainability standards.  These differences underpin the argument against the FAF’s involvement in sustainability standard-setting.

The language of Goal 6 focuses on FAF “actively monitor[ing] and engag[ing] with stakeholders, regulators, and Congress to ensure our organization can constructively contribute, as appropriate, to any future standard setting relating to sustainability reporting.”

Some of the specific points raised by the pair include:

… the main objective of the FAF has been to ensure that the FASB fulfills its mission of establishing and improving high-quality financial accounting and reporting standards. These standards give investors confidence in financial reporting and make it easier for them to compare financial reports across time periods and companies.  The singular focus of financial reporting—painting an accurate financial picture of a company for investors—lends itself to objective, auditable, quantifiable, and comparable metrics.

Conversely, sustainability standards are imprecise, inconsistent, and unfocused.  Recent comments on the SEC’s proposed climate rule have cited the ‘incoherent’ and highly speculative nature of sustainability reporting and disclosure. Unlike financial accounting standard-setting, sustainability standard-setting suffers from a dearth of well-researched and established expertise. Sustainability standards are built on guesswork and data gaps.  Coping with long time horizons, obtaining hard-to-capture data, applying extremely complex modeling, identifying meaningful metrics, and similar challenges stand in the way of consistent, comparable, reliable sustainability reporting…

Financial reporting benefits all investors (who by definition share an interest in financial returns), whereas sustainability reporting currently benefits only investors for whom sustainability factors into decision-making.  Sustainability standards are aimed at a broader stakeholder audience with a diversity of objectives, some of which may conflict with one another.  Absent a clear audience or objective, sustainability standards are unbounded in scope and subject matter.  

The inability to define, let alone produce, accurate and consistent sustainability standards invites subjectivity and political influence. 

This is yet another development we continue to watch.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile