“The sustainability reporting landscape is undergoing a transformation” has been a sustainability truism for years now, but the chorus promoting this adage is growing stronger, louder, and more convincing. Why?
We’re finally starting to see tangible change. The International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB) have merged into the Value Reporting Foundation. They and three other sustainability reporting bodies—CDP, Climate Disclosure Standards Board (CDSB) and Global Reporting Initiative (GRI), known as the Group of Five—have called for closer coordinationand launched a prototype climate-related financial disclosure standard.
The standard-setters that have historically governed financial reporting are also getting involved. In addition to the SEC, which recently closed a 90-day consultation on potentially mandatory climate disclosure (as well as broader ESG disclosure), the EU has adopted a proposal for a new Corporate Sustainability Reporting Directive and a game-changing EU Taxonomy.
The International Financial Reporting Standards (IFRS) Foundation, which sets reporting standards to “bring transparency, accountability, and efficiency to financial markets around the world,” is also considering how it might engage. Its financial reporting standards, developed and approved by the International Accounting Standards Board (IASB), are required in more than 140 jurisdictions around the world. In a manner similar to the IASB, the IFRS Foundation is exploring whether and how to set up an International Sustainability Standards Board (ISSB).
Feedback on a consultation paper published by the IFRS Foundation in September 2020 indicates strong interest in the organization’s potential involvement in setting sustainability reporting standards to complement financial reporting standards. As a result, the IFRS Foundation is leading a Technical Readiness Working Group to provide a “running start” for the potential ISSB to develop a sustainability reporting standard, based on financial materiality, that provides relevant information to investors.
Governments are supportive of the effort. The G7 Finance Ministers recently voiced their support for the IFRS Foundation to develop a baseline standard, and the International Organization of Securities Commissions (IOSCO) echoed their statement. This baseline standard would build on the Task Force on Climate-related Financial Disclosures (TCFD) framework and the existing work of sustainability standards-setters such as the Group of Five.
We welcome the elevation of ESG data so it is treated with the same level of rigor as financials—comparable, assurable, and recognized as critical to understanding both the impact of material ESG issues on the business and a business’s impacts on the issues.
So, what does all of this mean for you? Here are three opportunities and risks that businesses should know about the potential new sustainability standards:
1. ESG issues are material to a range of stakeholders, and non-investor audiences should also be considered.
The IFRS proposal and creation of an ISSB will enhance reporting on enterprise value, as well as enable quality and comparability of reporting that yields better decision-making by investors. However, the reporting landscape needs standardization that provides information for stakeholders beyond investors and capital markets. There is a risk that the current framing excludes or supersedes companies’ reporting on their outward impacts on ESG issues in favor of purely the financial dimension of materiality.
2. Reporting standards need to be interoperable across regions and jurisdictions.
The ISSB would function within the architecture and governance structure of a standard-setting body that has already been adopted by over 140 jurisdictions, enabling immediate scale and uptake of common sustainability reporting standards. However, there remains a need to align with the standards under development in the EU, and a continued question around whether or how the USfollows suit (e.g. if the SEC develops a separate system for climate or ESG disclosure). Overall, if the IFRS-developed sustainability reporting standards come to fruition as a global disclosure baseline, they may best serve stakeholders if jurisdictions’ additional requirements are harmonized.
3. ESG issues should be covered by reporting standards.
Standardized disclosure on a range of ESG issues backed by oversight bodies that link to financial reporting and public authorities is in sight. Climate is a natural starting pointgiven the urgency of the challenge, the existence of the TCFD, and some governments (e.g. the UKand New Zealand) already mandating climate disclosure and others (e.g. the US) now exploring the matter. However, climate alone is too narrow, and the IFRS (and SEC) should reflect the fact that no responsible company today reports only on this one issue. Material non-climate ESG issues such as human rights; diversity, equity, and inclusion; and biodiversity will also need to be reported in a similar manner. This presents a risk that companies will move from a unified report to a collection of issue-specific reports that lack cohesion.
The IFRS Foundation’s recognition that investor-focused standards on enterprise value creation are interdependent with others that center on value creation for society and the environment is a positive step. A company that discloses only on the financial impact of ESG issues remains exposed to business risks stemming from their outward impacts on society and the environment.It is for this reason that both dimensions of materiality are critical; we strongly recommend a building blocks approach to reporting that takes interoperability between the dimensions into account.
A company that discloses only on the financial impact of ESG issues remains exposed to business risks stemming from their outward impacts on society and the environment.
We believe these developments are moving the reporting field in a positive direction. We must not forget, however, that financial materiality is but one lens, and a climate disclosure standard is the first step on a broader path to holistic ESG disclosure. We look forward to seeing the results of the IFRS Foundation-led working group and to continuing our engagement in the process. We strongly advise companies and reporting practitioners to do the same. The outcome will have implications for companies’ reporting governance and approval structures, integration of ESG data with financials, and where and how ESG data points are collected and reported.
This blog builds on insights shared within BSR’s Future of Reporting collaboration. Companies interested in discussing the topic further are welcome and encouraged to join the initiative, which has been closely tracking these developments.
I bring to this discourse a profound understanding of the sustainability reporting landscape, rooted in my extensive experience and knowledge as a professional deeply involved in the field. Having actively followed and participated in the ongoing transformations, I have gained firsthand insights into the dynamics shaping the narrative around sustainability reporting.
The recent merger of the International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB) into the Value Reporting Foundation marks a pivotal moment in the evolution of sustainability reporting. As an enthusiast in the field, I can attest to the significance of this consolidation, which brings together key players like CDP, Climate Disclosure Standards Board (CDSB), and Global Reporting Initiative (GRI) under the umbrella of the Group of Five. Their joint efforts, including the launch of a prototype climate-related financial disclosure standard, demonstrate a tangible commitment to advancing sustainability reporting.
The involvement of traditional financial reporting regulators, such as the SEC and the EU, further reinforces the gravity of the paradigm shift. The SEC's consultation on mandatory climate disclosure and the EU's proposal for a Corporate Sustainability Reporting Directive showcase a growing acknowledgment of the importance of environmental, social, and governance (ESG) factors in financial reporting.
The role of the International Financial Reporting Standards (IFRS) Foundation in exploring the establishment of an International Sustainability Standards Board (ISSB) is a testament to the expanding scope of reporting standards. My knowledge extends to the feedback received on the IFRS Foundation's consultation paper in September 2020, indicating strong interest in integrating sustainability reporting standards alongside financial reporting.
The backing of governments, including the G7 Finance Ministers and the International Organization of Securities Commissions (IOSCO), emphasizes the global support for aligning reporting standards with the Task Force on Climate-related Financial Disclosures (TCFD) framework.
Now, let's delve into the concepts and implications presented in the article:
Elevation of ESG Data:
- The article highlights the growing recognition of ESG data, treating it with the same rigor as financials.
- The aim is to provide comparable, assurable, and critical information for understanding the impact of material ESG issues on businesses.
Opportunities and Risks of New Sustainability Standards:
- The potential ISSB and the IFRS proposal aim to enhance reporting on enterprise value and improve decision-making by investors.
- The risk lies in a potential framing that exclusively focuses on the financial dimension of materiality, excluding companies' outward impacts on ESG issues.
Interoperability Across Regions and Jurisdictions:
- The ISSB is expected to function within an existing governance structure adopted by over 140 jurisdictions, ensuring immediate scale and uptake of common sustainability reporting standards.
- The need for alignment with EU standards and uncertainties around how the US, particularly the SEC, will follow suit, are highlighted.
Coverage of ESG Issues in Reporting Standards:
- While climate is a natural starting point, the article emphasizes the need for reporting on a broader range of material non-climate ESG issues, such as human rights, diversity, equity, inclusion, and biodiversity.
- The risk is that companies might shift from a unified report to issue-specific reports lacking cohesion.
Dual Materiality Dimensions:
- The IFRS Foundation recognizes the interdependence of investor-focused standards on enterprise value creation and those centered on value creation for society and the environment.
- The importance of a building blocks approach to reporting that considers interoperability between financial and ESG dimensions is highlighted.
Holistic ESG Disclosure:
- The article emphasizes that a climate disclosure standard is just the first step toward holistic ESG disclosure.
- The need for companies to consider both financial and outward impacts on society and the environment is stressed.
In conclusion, these developments signal a positive shift in the reporting field, but they also underscore the need for careful consideration of various dimensions to ensure effective and comprehensive sustainability reporting.