Wednesday 10 November 2021
Following the confirmatory announcement at COP 26 ‘the proposed’ International Sustainability Standards Board is now ‘The ISSB’, period. It’s what’s been mooted, hinted at, suggested over the past twelve months, ever since the IFRS Foundation first issued its Consultation Paper on Sustainability Reporting. That document contained eleven questions raised by the IFRS as to what their role could, or should be, within a sustainability reporting world. Those questions have been answered, analysed, and acted upon. The new board has been formed and the process to appoint its Chair is in motion.
So, the board’s work will now begin.
Those who’ve been following this developing ESG story over the past year, might say though ‘the work’ started way before the announcement, at least indirectly. One of the more positive results of having a multitude of sustainability reporting frameworks being developed over many years, is the extent to which different ways of thinking, different reporting processes, and differing techniques for collecting ESG data, now already exist. It’s this wealth of experience that forms the base from which the ISSB will operate. The work of the new board will build upon what’s already been created, tapping into existing IP as it begins to develop what it describes as “a comprehensive global baseline of high-quality sustainability standards”. There’s no question as to the focus of the first of these; climate. On the day of the announcement the ISSB published for consideration a Climate-Related Disclosures Prototype Standard, itself the product of previous work undertaken by existing key ESG actors.
So, confirmation of the board’s formation does put to rest one question.
However, others may now to need to be considered.
Question One: To what degree will Integrated Reporting (‹IR›) become more central to business reporting in general?
The concept of ‹IR› may be new to some readers, as arguably its application has, for whatever reason, been rather limited so far. That may be about to change. Last year the developer of ‹IR›, the International Integrated Reporting Council (IIRC), joined forces with the Sustainability Accounting Standards Board (SASB) to become the Value Reporting Foundation (VRF). This body itself is to be consolidated into the new ISSB. Perhaps therefore we can see the direction of travel for ‹IR›.
The philosophy behind ‹IR› is that reporting should be more than just a financial reporting discipline. ‘Enterprise Value’ are the key words here, and it’s these words that repeatedly feature in the press statement re the ISSB’s formation. It might be noted that the IIRC’s framework is one that focuses on all the ‘capitals’ businesses have access to (financial, manufactured, intellectual, human, social/relationship, natural) and how they’re to be considered as ‘stocks of value’, increasing, decreasing, and transformed by the organisation’s activities. In short, ‹IR› looks at how the business creates or erodes value, the Enterprise Value, over time. ‹IR› itself is the result of a business philosophy the IIRC describes as Integrated Thinking. For them, the “long-term vision is a world in which integrated thinking is embedded within mainstream business practice, in the public and private sectors”. Thus, with the VRF and ISSB now joining forces, could we see the IIRC’s ideas increasingly feature within reporting frameworks? An objective that ‹IR› should “provide the connectivity” between financial reporting and sustainability reporting, might suggest so. Was that what the IFRS envisaged when those eleven questions were first put out for consultation? If so, then for businesses this could mean even more reporting requirements, more disclosure, and therefore more cost.
Question Two: Will the ISSB’s sustainability standards be truly global?
In a previous article we questioned whether the board’s work really will result in standards that are accepted and applied globally; specifically, will the FASB, SEC and/or EU adopt them? Or, will they move in a different direction, with the costs of reconciliation, and convergence that decision would inevitably bring? On this point it’s worth highlighting an organisation not being consolidated into the ISSB, and that’s the Global Reporting Initiative (GRI), the body that started the sustainability reporting movement back in 1997.
Whilst its interim CEO, Eric Hespenheide, is “pleased that the IFRS Foundation has recognised the merits of incorporating sustainability considerations into financial disclosures”, it appears the work of the GRI will not be central to the ISSB’s progress.
Keen-eyed observers of Eric’s congratulatory statement will notice the following comment; “GRI’s and the European Financial Reporting Advisory Group’s Statement of Cooperation means that the two organizations are currently working together to co-construct new EU sustainability reporting standards, which intend to contribute to further global convergence.” In the context of the ISSB becoming ‘The Leader’ in developing sustainability standards, what do Eric’s words mean, and how would EFRAG’s work with the GRI really contribute to convergence?
Question Three: What about compliance?
Arguably, financial reporting standards only have the decision-making value they deserve due to that sceptical second pair of eyes that question compliance, i.e., the audit. So, what should we expect with sustainability standards? What level of assurance will be required? Will audit rules be developed alongside to check on what’s being reported and disclosed or will the regulatory bodies believe that existing data collection and reporting processes are already sufficiently robust and independent? For example, for climate disclosures will the Climate Disclosure Project (CDP) and their well-established data collection processes become the de facto ‘audit standard’? Of course, once any increased independent third-party scrutiny is required, there’s a cost that must be borne, by someone.
Question Four: What’s wrong with Zoom Erkki?
This question arises from the words of Erkki Liikanen, Chair of the IFRS Foundation Trustees (Trustees):
“The ISSB will have a global footprint and presence through offices in the Americas, Asia and the EMEA (Europe, the Middle-East and Africa) region.”
Global footprint? Really? In the present ‘climate’ is that just a poor choice of words, or a poor business model? Somehow, I don’t think we expected that. So, come on Erkki, “get with the programme” - surely the ISSB can do its thing on-line, just like the rest of us.