Building Blocks Approach in Corporate Sustainability Reporting: Strengthening Accountability and Transparency

In recent years, sustainability reporting has become increasingly essential for global corporations, driven by growing public awareness and pressure from various stakeholders on sustainability issues. In response, the International Federation of Accountants (IFAC) developed the concept of Building Blocks in Corporate Sustainability Reporting. This approach is designed to enhance consistency, comparability, and reliability of sustainability information reported by companies, facilitating more effective reporting to stakeholders and investors.

This approach comprises two primary blocks, each with a distinct yet complementary focus, providing a foundation for comprehensive reporting on the economic, social, and environmental impacts of companies. These two blocks – Block 1: Investor-Focused Sustainability Information Material to Enterprise Value and Block 2: Multi-Stakeholder Focused Sustainability Reporting – enable companies to meet diverse information needs for different stakeholders.

Block 1: Investor-Focused Sustainability Information Material to Enterprise Value

The first block of the building blocks approach emphasizes reporting that is relevant to investors and stakeholders concerning the company’s value, both short, medium, and long-term. The primary goal of Block 1 is to provide a comprehensive understanding of how certain sustainability factors may impact company value and long-term economic performance. Key elements in this block include:

1.    Governance, Strategy, and Risk Management: This block includes qualitative information on governance, strategy, and risk management related to material sustainability factors. By providing this information, companies can offer investors insight into the measures taken to manage sustainability risks, such as climate change and resource scarcity, that could affect financial performance in the future.

2.    Performance Targets and Quantitative Metrics: In addition to qualitative information, Block 1 also covers performance targets and quantitative metrics that show how well a company is managing sustainability issues. These metrics can be cross-industry, as developed by the World Economic Forum (WEF) in its core metrics, or industry-specific, such as the standards issued by the Sustainability Accounting Standards Board (SASB). Quantitative data enables investors to compare companies and assess the effectiveness of sustainability strategies within relevant industry contexts.

3.    Implementation of International Standards by IFRS and ISSB: A key objective of Block 1 is to establish a global baseline of reliable sustainability standards, overseen by the International Sustainability Standards Board (ISSB) under IFRS. This standard is expected to become a globally recognized benchmark for auditable sustainability reporting, ensuring that reported information is more consistent and credible for investors and capital markets.

With these standards in Block 1, companies can more effectively present relevant data to support investor decision-making and meet expectations for long-term enterprise value.

Block 2: Multi-Stakeholder Focused Sustainability Reporting

While Block 1 focuses on investor-relevant information, Block 2 addresses broader sustainability aspects, specifically those related to a company’s impact on the economy, environment, and society. This block enables companies to provide more comprehensive information to stakeholders who may have different interests from investors, including local communities, governments, and non-governmental organizations. The main components of Block 2 are:

1.    Impact on Sustainable Development: Information reported in Block 2 can include indicators supporting Sustainable Development Goals (SDGs) and other public policy objectives. For instance, within the European Union, companies may need to report in alignment with the European Green Deal, which aims to achieve sustainability in Europe. This information allows stakeholders to understand a company’s broader contributions to sustainable development.

2.    Global and Local Reporting Standards: Reporting in Block 2 often utilizes globally recognized standards, such as the Global Reporting Initiative (GRI), along with more jurisdiction-specific guidance. These standards allow companies to tailor sustainability information to local policy contexts and needs.

3.    Impact on Economy, Environment, and Society: Unlike Block 1, which focuses on enterprise value, Block 2 covers reporting on broader impacts on the environment and society. This information includes, for example, the social impact of operations, carbon emissions not fully measured through enterprise value, and the economic contributions of the company to local communities. By providing this information, companies help stakeholders understand the long-term impact of company operations within a broader context.

Interoperability between Block 1 and Block 2

A significant advantage of this building blocks approach is the interoperability between these two blocks. IFAC designed this approach to enable companies to collect the same sustainability information to fulfill reporting needs for both Block 1 and Block 2. As such, companies can avoid data duplication and increase reporting efficiency. Information collected once can be used to serve various reporting purposes, simplifying the navigation of multiple standards and meeting different reporting needs effectively.

A Flexible Perspective in Sustainability Reporting

In practice, the building blocks approach enables companies to adjust reporting according to evolving needs and stakeholder preferences. Factors such as stakeholder pressure, evolving regulations, and changing investor preferences can influence the type of reporting most relevant to the company.

For example, carbon emissions might initially be a matter of public awareness but, over time, investors may begin to factor a net-zero transition into their asset allocation decisions. As the financial consequences of environmental issues become more apparent, carbon emissions eventually need to be reported in financial statements under Generally Accepted Accounting Principles (GAAP). This approach allows companies to present comprehensive information reflecting current conditions and priorities.

Integrating Sustainability and Financial Reporting to Support Long-Term Value

Through the building blocks approach, IFAC aims to encourage companies to integrate sustainability reporting with traditional financial reporting. This integration creates a more comprehensive corporate reporting system, providing stakeholders with a complete picture of a company’s value, not only from a financial perspective but also in terms of sustainability.

Conclusion

The building blocks approach designed by IFAC provides a robust framework for companies to structure their sustainability reporting in line with global and local standards. By separating sustainability reporting into two blocks that focus on investor and multi-stakeholder needs, IFAC aims to strengthen the reliability, transparency, and relevance of sustainability information. Through this approach, companies are expected to achieve a balance between economic value and their contributions to global sustainability goals, creating a positive impact on society at large.

With wider adoption, this approach will not only help companies increase accountability but also build trust with stakeholders and foster a more sustainable economy for the future.