This is an abbreviated version of a more thorough Directorship magazine Viewpoint article exclusively for NACD members. If you are an officer or director of a public, private, or nonprofit organization, you can become an NACD member to view the complete article and related resources.

Executive managers and board members could be forgiven for thinking that now that the International Financial Reporting Standards (IFRS) Foundation has entered the sustainability reporting space, the turbulence surrounding so-called environmental, social, and governance (ESG) disclosures will die down. After all, who could possibly be better than the foundation, the leading international administrator of financial accounting, to step in and quell the cacophony of competing frameworks for nonfinancial accounting?

Indeed, what has been missing the most in nonfinancial reporting for the past 20 years is precisely the kind of rigor and consistency that the IFRS standards possess. Along with the generally accepted accounting principles (GAAP) in the United States, the IFRS standards provide clear guidance for the preparation of financial statements around the world.

But everything the foundation intends to do—and ESG itself—falls well short of true sustainability accounting, thanks mainly to the disregard of core principles of the field. What will the core principles be in the foundation’s vision of sustainability accounting? Which of the competing schools of thought does it subscribe to, and is it the right one? Is it really time to pop the cork on all of this, or does the foundation’s arrival in the sustainability arena amount to a setback of some kind? Business leaders should brace themselves accordingly.

Sustainability Schools of Thought

Far from being a unified field, in the sustainability world there are at least two competing schools of thought. Depending on which ultimately prevails, the makeup of sustainability accounting could go in two very different directions in the coming years.

The first of the two is the sustainability accounting school, a doctrine that concerns itself with stakeholders of all walks and not just shareholders. This is the school most often associated with the Global Reporting Initiative. The challenge it sets out to address is how best to assess an organization’s inside-out impacts on vital resources of all kinds and the well-being of those who depend on them. In that regard, sustainability accounting is stakeholder-centric.

The second is the value creation school, most often associated with the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB), which recently announced their merger to become the Value Reporting Foundation. The primary interest of the value creation school is how best to assess an organization’s ability to create value and then measure and report it—shareholder value, that is.

Embedded within the value creation school are two other underlying doctrines: risk management and impact accounting. Both of these sub-schools, which are associated with, for example, the Task Force on Climate-related Financial Disclosures and the Impact-Weighted Accounting Initiative at Harvard University, respectively, have long-term shareholder value creation at their heart. And contrary to the sustainability accounting school, the chief concern of the value creation school is the outside-in impacts of the world on an organization itself, and the effects they might have on its ability to create shareholder value.

It is the value creation school and its subsidiary doctrines where most of what passes for ESG issues lives. That makes ESG unabashedly shareholder-centric, though its frameworks occasionally include consideration of the impacts organizations have on non-shareholder stakeholders. Even then, it is only the effects such impacts might have on shareholder value that make them important or material in the value-creationist view.

To read the full article, see the July/August 2021 issue of Directorship magazine. Check out the full and previous issues of the magazine here.

Mark W. McElroy is the founding director of the Center for Sustainable Organizations.

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