ThinkTWENTY20

By Alan Willis, FCPA, FCA

At a pre-COVID conference at the Rotman Business School in Toronto early in 2020, Michael Jantzi, CEO of world-renowned Sustainalytics, publicly declared “We need IFRS for ESG!”.

As a long-time pioneer of research on sustainability integration into portfolio decisions within the global investment community, Jantzi was again pointing out the confusion caused by the current “alphabet soup” of standards, frameworks and recommendations for corporate ESG, sustainability and climate-related disclosures. The investment community does not need wall-to-wall sustainability reporting about all of a company’s impacts on the planet and society – important as these may be to many stakeholders from a corporate accountability and transparency perspective.

What investors do seek to accompany financial statements, along with MD&A and governance disclosures, is reliable, comparable disclosures about ESG-related performance factors and risks that materially affect – or may in future materially affect – a company’s financial performance and value.

As I proposed in 2019, there is a need for one globally accepted reporting package designed to meet investor needs for disclosures about ESG factors material to their decision making, and a separate globally accepted package for disclosures about the broader universe of a company’s environmental, social and economic impacts – matters of concern to other stakeholders, such as customers, employees, communities and society at large.

We may be closer to this outcome than I ever dreamed likely. My ESG blogs in February and March this year highlighted recent announcements by the IFRS Foundation, supported by the International Organization of Securities Commissions (IOSCO) and many others, about its proposal to establish a new standards board alongside the International Accounting Standards Board (IASB – the source of IFRS), that would develop and maintain standards for reporting investor-material sustainability information relevant to enterprise value creation.

Later in March, the IFRS Foundation announced the formation of a working group of its yet-to-be-formed International Sustainability Standards Board (ISSB), reporting to the IFRS Foundation, to fast-track (my words!) or accelerate (their words!) convergence of existing sustainability and climate-related disclosure standards, frameworks and recommendations.

This working group comprises representatives from the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), (the two latter about to merge and become the Value Reporting Foundation), the Task Force on Climate-Related Financial Disclosures (TCFD), the Climate Disclosure Standards Board (CDSB), the World Economic Forum (WEF), as well as the IASB. It is to have observers from IOSCO and the International Public Sector Accounting Standards Board (IPSASB), and will engage closely with the Global Reporting Initiative (GRI) and the Carbon Disclosure Project (CDP). Its objective is to provide the future ISSB with a “running start,” rather than reinventing the wheel from scratch.

The IFRS Foundation also issued in April proposals for amendments to its constitution necessary to accommodate the future ISSB. Comments are invited by July 29, 2021.

IFAC has meanwhile issued a revised “Building Blocks” approach to show how the future reporting landscape might comprise one Building Block for investor-focused sustainability information material to long-term enterprise value creation and investor decision making (“IFRS for ESG”). This would be the domain of the new ISSB’s standards and guidance. The second Building Block would address multi-stakeholder focused sustainability reporting under global standards and guidance, such as those of the GRI’s Sustainability Standards Board.

Perhaps even more significant have been releases from IOSCO in March and May, the former announcing a new IOSCO Technical Expert Group (TEG) to work closely with the IFRS Foundation’s new working group on technical recommendation about the future ISSB sustainability reporting standards, and the latter emphasizing its strong support for the IFRS Foundation’s vision for the future ISSB, with its aim to deliver high-quality standards “to address the priority the needs of capital market participants within a reasonable timeframe.”

This high degree of IOSCO support is key to the timely adoption of the ISSB standards in worldwide securities regulatory jurisdictions, so as to make them mandatory (like IFRS), not just voluntary.

A key feature of concern to the IOSCO’s new TEG is the “promotion of digitalization by developing a taxonomy for sustainability-related reporting in a structured electronic, machine-readable format.” Prioritization of climate-related financial disclosures, building on the TCFD recommendations, was also strongly encouraged.

In short, the IFRS Foundation seems to be very much on track to establish its new International Sustainability Standards Board by this Fall. One side effect of this may well be to bring corporate sustainability reporting very much within the domain of financial reporting executives, investor relations officers and audit committees, not just sustainability departments.

The ISSB’s work would be even more significant, should the SEC decide to reference the new sustainability reporting standards as guidance for 10-K disclosures about material risks and uncertainties, similar to its 2010 release about material climate-related disclosure in 10-Ks.

And, most recently, closer to home (Canada), was the May 13 announcement by the Accounting and Auditing Oversight Councils in Canada that they are establishing an Independent Review Committee on Standards Setting in Canada.

This will consider the adequacy of the governance and structure for accounting, auditing and assurance standards setting in Canada for the future, including the needs for standards in areas such as environmental, social and governance reporting.

Specifically, the terms of reference for this new committee require it to consider, inter alia, the potential for creation of a Canadian Sustainability Standards Board to mirror the proposed establishment of the IFRS Foundation’s ISSB. To be chaired by prominent lawyer and former OSC chair Ed Waitzer, the committee’s eight-person membership includes Michael Jantzi. IFRS for ESG may yet come to pass!