Exclusive: FRC’s standards chief on the maze of sustainability reporting
NZI sits down with Mark Babington, the regulatory standards director at the Financial Reporting Council
As more and more asset owners and therefore corporates implement net green principles into their investment strategies, a relatively young debate about the challenges around sustainability reporting standards is increasingly heating up.
Time for Net Zero Investor to sit down with one of the leading voices in this field: Mark Babington, the executive director of regulatory standards at the Financial Reporting Council, the watchdog responsible for regulating auditors, accountants and actuaries, and setting the UK's Corporate Governance and Stewardship Codes.
City of London-based Babington leads the division responsible for the FRC technical and public policy work, covering audit, corporate reporting, corporate governance and stewardship. His department also includes the FRC’s Stakeholder Engagement work.
Previously, Babington led the FRC’s UK Audit Policy programme and before he joined the FRC, he had a twenty-year stint at the UK's National Audit Office.
Internationally, Babington is a member of the International Ethics Standards Board for Accountants, which sets the global Code of Ethics for the accountancy profession, and he is chairman of IESBA’s Sustainability Working Group.
Mark, the industry recently gathered in Stockholm at ICGN to zoom in on sustainability reporting standards. It was fairly evident that many asset owners, corporates and regulators struggle each with their own set of challenges. What do you see as the biggest challenge or hurdle at the moment?
I think there is huge interest and support for high quality, consistent sustainability reporting, but it brings with it the challenge of how to best create an integrated package of decision useful information, rather than just adding more pages. Some of the information needed to support this reporting will lack the maturity of reporting systems and internal controls that are found in financial reporting, which may impact on the quality of what is reported, and how effectively it supports independent assurance.
At ICGN, you called 'greenwashing' a crime. Can you elaborate on that?
The term I used was fraud – after all it is using information to misrepresent a position to try and secure funding or investment. We know that ESG information is increasing being used for capital allocation decisions – if that information is not reliable or presents a misleading picture then those decisions are being undermined.
Before we look ahead, what progress has been made in recent years?
In the UK I would say significant progress has been made in recent years – we have adopted TCFD reporting, and our own thematic reviews have identified many areas of good practice. We also see evidence of companies working to better align their non-financial reporting with their financial reporting, which has been an area of longstanding weakness.
What are you seeing as the regulator who sets the stewardship and corporate governance codes?
A heightened focus on ESG matters on the part of signatories to both codes. Our Stewardship Code now covers asset owners and managers with over £46 trillion under management, and the outcome-based focus of the Code is delivering better reporting which focuses on tangible benefits arising from good stewardship.
We are soon to consult on a revised Corporate Governance Code which will recognise the increased focus on and interest in ESG information, and to ensure that this is integrated within the governance of Code companies.
The code is being reviewed currently and one of the areas they are focusing on is for expanded Sustainability and ESG reporting. A much-needed development?
Yes – as it meets the needs of users of annual reports and accounts more effectively, which is an important driver of our work. However, the challenge is, as I have noted how to deliver better information to meet users needs rather than just more information.
Finally, some investors and managers increasingly demand more detailed ESG data, so they can understand and monitor sustainability efforts better. Do you recognise that trend?
Yes, we do – which returns us again to the need for better information not more information. I think it is also important for reporting to develop globally so it is consistent, comparable and meets the needs of multiple jurisdictions.
Anything else you would like to say or share with our readers?
This is such a fast-moving subject – there are initiatives developing internationally and in different jurisdictions – we need to work together to ensure that it supports the continued provision of reliable information to capital markets to support decision making. There is much to keep us busy!