IFRS Foundation Next Steps Towards Global Standards for Sustainability Reporting

By Alan Willis, FCPA, FCA 

In September 2020, the IFRS Foundation issued a consultation paper on sustainability reporting, inviting comments to be sent in by December 31, 2020. Amazingly, they received nearly 600 responses from a diverse range of organizations and individuals around the world (all publicly available at https://www.ifrs.org/projects/work-plan/sustainability-reporting/comment-letters-projects/consultation-paper-and-comment-letters/#comment-letters). On top of that, they carried out a large scale, widespread outreach program to garner feedback, involving thousands of interested parties. Early in February, the Trustees of the Foundation met to review the responses to the first three questions posed in the consultation paper:

1. Is there a need for a global set of internationally recognized sustainability reporting standards?

2. If yes, should the IFRS Foundation play a role in setting such standards, such as by establishing a sustainability standards board governed by the IFRS Foundation?

3. If yes to both the above, what would be the requirements for success in doing so?

First, the responses indicated urgent demand worldwide for sustainability reporting standards to improve global consistency and comparability in sustainability reporting – a demand that has gathered much strength in the investor community in recent years. We need “IFRS for ESG,” as one leading investor voice has expressed it. Ironically, the Global Reporting Initiative (GRI) Standards for sustainability reporting were first issued (as Guidelines) in 2000 and are now used voluntarily by nearly 70% of the world’s largest companies, but sustainability reporting and use of the GRI Standards are not mandatory in any reporting jurisdiction. As well, because they aim to address the information needs of all types of stakeholders, GRI-based sustainability reports fail to be user friendly for investors wanting to find disclosures material to their assessment of financial performance and prospects.

Second, the IFRS Foundation has established a sound reputation, role and stature in its more than two decades of oversight of the work of the International Accounting Standards Board (IASB) in developing International Financial Reporting Standards (IFRS), which have been adopted in nearly all jurisdictions except the US, where FASB accounting standards are required for use by SEC registrants. There was, therefore, a strong recognition that there is a role for the IFRS Foundation to play in setting sustainability reporting standards, through establishing what the consultation paper termed a “Sustainability Standards Board” (SSB) alongside the IASB. 

What has yet to be decided, however, is whether such standards should focus primarily on sustainability information needed in capital markets as an accompaniment to the IASB’s IFRS for financial statements and, indeed, whether standards for climate-related reporting and disclosures should be the first priority before standards for other environmental and social aspects of sustainability. This would be an interesting enough proposition at any time in view of the historical roots of the IFRS Foundation and IASB, which focus on standards for financial statements to reflect the results of an entity’s past commercial transactions in monetary terms. 

The appearance of the IFRS Foundation on the sustainability reporting landscape becomes all the more interesting and complicated, however, because of the several pre-existing organizations that, over the last two decades, have followed the GRI into various aspects of and approaches to sustainability reporting. 

It is only in the last year that the leaders among such organizations – namely, the GRI, the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), the Climate Disclosure Standards Board (CDSB) and the CDP – have indicated their intention to collaborate in reducing the mosaic and confusion of multiple reporting frameworks, standards and guidance by converging toward a single sustainability reporting standards framework or architecture. A big question now is how these existing initiatives would interface with and contribute to the work of an IFRS Foundation Sustainability Standards Board, and what, if anything, would be their respective roles going forward alongside the new SSB.

Meanwhile, following their February 2021 meeting to address the above three questions, the Trustees of the IFRS Foundation seem sufficiently confident about the affirmative answers to the first two questions that they have agreed to consider in greater depth the conditions or requirements for success prior to deciding on the formation of a new board. These requirements include the need for sufficient global support from public authorities (including securities regulators) and market participants, e.g., investors and corporate preparers; achieving appropriate technical expertise for the Trustees, SSB members and staff; adequacy of independent funding and governance structure; working with regional initiatives to achieve global consistency; and building appropriate synergies with financial reporting. 

Above all would be the need to build off, consolidate and not reinvent the useful body of standards, frameworks and recommendations already in existence thanks to the work of organizations such as the GRI, SASB, the IIRC, CDSB, CDP and, more recently, the Task Force on Climate Related Financial Disclosures (TCFD). Positive signals already received from the likes of IFAC and IOSCO, as well as the aforesaid organizations, augur well for what, by IFRS Foundation and IASB precedents, could be rapid progress this year.

The Trustees agreed to create a Steering Committee to consider the requirements for success, with a view to producing a definitive proposal for the SSB and a future timeline by September 2021. A key milestone from all this could then come, they suggest, as soon as November 2021 at the UN Climate Change Conference (COP26), with an IFRS Foundation announcement about its establishment of a Sustainability Standards Board.

The next meeting of the IFRS Foundation Trustees will be in early March 2021. At that time, there will be worldwide interest in whether forward momentum is being maintained on this promising and urgent initiative. It’s hard to overstate the importance of these developments, if capital markets, as well as society in general, are finally going to get the information needed for wise, essential decisions about achieving sustainability of the planet and the people who depend on it.