Thursday 28 April 2022
In November of 2021, during COP26, the IFRS Foundation announced the creation of the International Sustainability Standards Board (ISSB), to help meet the growing demand for high quality, transparent, comparable Environmental, Social, and Governance (ESG) reporting. The purpose of this move is for the ISSB to deliver a global baseline of sustainability disclosure standards for capital providers to use in understanding companies’ sustainability-related risks and opportunities and to inform capital allocation decisions. The announcement of the ISSB is arguably one of the most compelling announcements related to climate standards to emerge from COP26.
To understand the significance of this announcement, one must understand the formidable, though uncoordinated nature of ESG and sustainability reporting frameworks to date. This move not only seeks to consolidate the ‘alphabet soup’ of sustainability reporting, but also add clarity to an often murky and difficult landscape to navigate. A brief and non-comprehensive survey of sustainability reporting initiatives helps to articulate the need for consolidation:
- 1997, Global Reporting Initiative (GRI).
- 2000, Carbon Disclosure Project (CDP).
- 2011, Sustainability Accounting Standards Board (SASB).
- 2015, Taskforce on Climate-Related Financial Disclosures (TCFD),
The ISSB is not a replacement for securities regulators or the policies of governments. It is, on the other hand, something onto which governments and securities regulators can add whatever is locally appropriate and relevant. The aim is to create a global baseline that local governments can add to and build on.
Many have noted the apparent merger of different standards taking place under the ISSB. Certainly, SASB and TCFD principles and standards are being applied. The ISSB is mapping its sustainability disclosure requirements to align with the TCFD pillars: governance, strategy, risk management, and metrics and targets. Core to the values of ISSB is consolidation and building onto existing standards, rather than creating new standards and guidance. The Value Reporting Foundation, in addition to CDSB, TCFD and the World Economic Forum have committed to contributing their content in order to achieve connectivity between financial reporting and sustainability reporting.
And this last point is critical: connectivity between financial and sustainability reporting is not just about alignment, but also about holding one (sustainability) in the same esteem as the other (financial). The most significant piece of the ISSB announcement involves the move toward equal prominence for sustainability and financial reporting.
Historic Impediments to the ESG Reporting Evolution
A few things have historically prevented the honest and courageous exploration and embracing of sustainability disclosures, such as those being consolidated by the ISSB. They have to do with ego and fear.
On one hand, investment decisions are driven by C-suite leaders who lean heavily on their in-house or external ESG experts for sustainability diligence. For a host of reasons, ESG and sustainability consciousness and insight have not been woven into the toolbox of the traditional CEO in quite the same way that financial acumen has been. This means that there exist, in most investments, a team leading the ESG diligence and offering their recommendations to investment decision makers. To allow ESG framework and disclosure evolution would mean the re-education or further education of these teams, whose power and relevance rest strongly on their niche expertise of a specific framework or two. So, in some circumstances, ESG leaders have historically been the quiet enemy of consolidation and clarity, as their unique value addition is nested in the mystifying nature of ESG frameworks.
On the other hand, holding ESG data at arm’s length has also behooved investment leaders. Considering ESG and sustainability the domain of the few can serve to release a C-suite decision maker from responsibility for knowing and understanding the full implications of ESG data on investment success. Fear of the unknown or the difficult to measure has prevented many leaders from pushing, as they should, for the consolidation and demystification of ESG reporting. A CEO should be as well versed with her ESG disclosures as she is with the company or fund financials. In the event she is not, the reason has everything to do with fear.
From a Sea of Frameworks to Consolidation
There is an undeniable tendency for data and transparency problems to involve extensive, diverse, and complicated solutions from multiple interested parties. It is perhaps natural that the need for better sustainability information and reporting inspired the emergence of multiple frameworks, such as GRI and, later, SASB. Thankfully, the natural tendency to scatter and feverishly create solutions often leads to the eventual tendency to consolidate, to centralize, and to strive for clarity.
And that is what is most needed now. In an investment environment with greater complexity, and greater emphasis on material data to dictate capital allocation, everyone is in search of more material data on potential investments. And one of the things that can enable the analysis of information and the comparisons of investments against one another (from both a financial and a sustainability perspective) is the uniformity of reporting requirements and disclosures. If company A and company B are reporting their financial information using the same principles and frameworks, one can compare them. If company A and company B, are on the other hand, using GRI and TCFD respectively, in their sustainability disclosures, comparison and analysis becomes far more difficult.
The move to consolidate the most useful and pervasive ESG frameworks is a smart one. ISSB’s capacity to offer the global business community a standard set of sustainability disclosures could dramatically improve not only ESG and sustainability reporting, but also (and perhaps more importantly), it could serve to demystify sustainability information, democratizing access to this important data, and enabling better decisions by investors.
What Companies and Investors Should Do to Prepare
With the forthcoming ISSB framework open for review and under development, there are many actions that companies, investors, ESG leaders and other interested parties can be taking.
- Educate yourself and your organization. Now is the time to make ESG and sustainability everyone’s business. Engage your in-house ESG team, your trusted ESG consultants or IASeminars to create a clear, accessible, high-quality training program to ensure all teams understand the ESG issues material to their company, the frameworks out there, the move toward consolidation by ISSB, and the power of weaving ESG into the DNA of the company and all its teams.
- Map and understand current ESG and sustainability reporting processes, gaps, and owners. Establish a strong understanding for how ESG data is collected, consolidated, managed, monitored, and reported within your business. Engage owners of various data threads and go deep to understand what is working, what is broken, where the gaps in information are, and how to align reporting processes with the issues most material to your business.
- Assess your reporting mechanisms to isolate constraints and improve efficiency. In any operations process, leaders are compelled to isolate the constraint and submit all other stages of the process to the constraint. This thinking can be applied to ESG data collection and reporting. Where does your material ESG data come from? Which data is easy to extract? Which data involves calculations, extra steps, multiple teams, or other constraints to obtain? Know your ESG reporting processes the way you know your supply chain or your assembly line. Elevate the constraint and organize your streams of data.
- Start aligning the analysis and reporting of accounting and sustainability If one thing is clear from the establishment of the ISSB, it’s that sustainability data must be as serious, comparable, rigorous, standardized and esteemed as financial data. The companies that are successful in their early adoption of the ISSB framework will be those that understand the value of integrated financial and sustainability information, and those that align and report both these types of data with insight and wisdom.
 Euromoney. Nov. 2021
 Value Reporting Foundation
 KPMG. April 2022