Progress on the Path to Global Sustainability Standards: Three Steps Forward, Two Sideways?

By Alan Willis, FCPA, FCA

The choir grows, the chorus swells, but is everybody singing from the same page?

In recent weeks, we’ve witnessed a steady stream of pronouncements about progress on and support for the path being taken by the IFRS Foundation to establish a new International Sustainability Standards Board (ISSB) by November, before the COP26 UN Climate Change conference in Glasgow.

For example, the IFRS Foundation has called for nominations for the positions of Chair and Vice Chair of the proposed ISSB, and established a Technical Readiness Working Group to enable the new board to build on the well-established work of long-standing international reporting initiatives, rather than starting from scratch. This new Working Group comprises leading organizations with expertise in reporting standard setting that focuses on meeting investors’ needs. It includes participants from the CDSB, TCFD, Value Reporting Foundation (formed through the June 2021 finalization of the IIRC and SASB merger announced late in 2019) and WEF, as well as the IASB. IOSCO and IPSASB will participate as observers. The Working Group will also “liaise closely” with the GRI (and the CDP) “as needed and to promote inclusivity.”

Meanwhile, the IFRS Foundation is awaiting comments by the end of July on amendments it has proposed to its constitution to accommodate the planned ISSB as a new sustainability standards setting body alongside the IASB, which sets and issues IFRS. 

The IFRS Foundation’s path to global sustainability standards, focused on investor information needs, has received significant votes of confidence and encouragement in recent weeks. First was in a communique issued by the G7 group of finance ministers meeting in London early in June, followed by the G20’s Financial Stability Board on July 7, when it released a Roadmap for Addressing Climate Related Financial Risks, and, most recently, came the G20 Finance Ministers Communique on July 10, which welcomed the IFRS Foundation’s work to develop “a baseline global reporting standard,” building on the work of the TCFD and other sustainability standards setters.

This echoed an IOSCO media release and report[1] issued on June 28, advocating a “global baseline of investor-focussed sustainability standards.” That report is itself a good summary of the IFRS Foundation’s vision and plan. Also, it clearly shows the high level of liaison occurring among key players such as the G7 and G20 finance ministers, the Central Bank Governors (FSB) and the IOSCO Board, with its Sustainable Finance Task Force and a new Technical Expert Group (co-led by the USA‘s SEC).

Promising Omens

All of this augurs well for the uptake of future ISSB standards, the first of which will relate to climate-change-related financial disclosures (building on the TCFD’s work), and their adoption in various worldwide jurisdictions that regulate corporate reporting in financial markets. IFAC continues to show its support, with a strong endorsement of the IOSCO report, encouraging it “to continue actively engaging with the IFRS Foundation so that the unprecedented and necessary momentum toward establishing an ISSB can be maintained.” On May 31, CPA Canada joined the chorus with support for the IFRS Foundation’s plans for the ISSB, and encouraged Canada’s private and public sector leaders to weigh in on these important steps. 

So, what’s going on in this space at the SEC? The winds of change mentioned in my March, 2021 blog continue to gain strength and attention. In June, Commissioner Herren Lee gave a notable address to a national corporate governance conference (“Climate, ESG, and the Board of Directors: You cannot direct the wind, but you can adjust your sails”).[2] Commenting on the ESG-related responsibilities of boards of directors in ESG-related matters, she not only referred to the SEC’s current  initiatives regarding climate change disclosures but also to the broader realm of climate change reporting initiatives, such as those of the TCFD, and to other ESG reporting initiatives, including those of SASB and the Value Reporting Foundation. 

Earlier in May, in what could be seen as a seminal speech about myths in ESG and climate-related reporting, Herren Lee spoke in Washington, DC, to an event hosted by the AICPA, the Chartered Institute of Management Accountants, SASB and the Center for Audit Quality on “Living in a Material World: Myths and Misconceptions about Materiality.”[3] Meanwhile, Republican-leaning commissioners continue to voice their concerns about the SEC and its role in making sustainability-related disclosure rules, as well as the IFRS Foundation’s proposal for a new ISSB. As I’ve said before, the plot thickens – the SEC has said more in the last 10 months about climate change disclosures than in the previous 10 years! Its next target for investor protection is the reliability and transparency of claims by investment fund managers about the “greenness” of investment products they offer as ESG-based funds.

Unstoppable March to Global Sustainability Standards?

Now we come to two questions about this seemingly unstoppable march to global sustainability standards. The first question, a surprise in fact, is why in May the IASB issued for public comment (by November 2021) an Exposure Draft of its proposed new Practice Statement on Management Commentary (PSMC). MD&A is the North American equivalent of Management Commentary, intended to accompany and supplement financial statements in providing a more fulsome picture of a company’s business – the story behind the financial statements, one might say. The unexpected feature is that, unlike the original Practice Statement issued by IASB in 2010, the Exposure Draft for the new version includes extensive recommendations for ESG disclosures to be included in various parts of a Management Commentary. The IASB does not consider MC as part of IFRS, so asserting compliance with IFRS does not require financial statements to be accompanied by MC. 

What is not clear is how the new MC would fit into the emerging standards landscape, in which it is expected that the new ISSB, under the umbrella of the IFRS Foundation (like the IASB), will issue investor-focused sustainability reporting standards, with a view to their IOSCO-supported adoption in worldwide jurisdictions. IOSCO never recommended the PSMC for adoption anywhere. Would future MC ESG disclosure recommendations align with ISSB sustainability standards or SASB standards? Would Value Reporting Foundation recommendations for integrated reporting align with other elements of the new MC? It simply strikes one as strange that the IFRS Foundation, through the IASB, would issue this MC exposure draft at a time when momentum is building for ESG and sustainability disclosure standards to be set by the future ISSB. Perhaps this unexpected development will be clarified in due course. Meanwhile it looks like a step sideways from the ISSB path.

And the second question is about the Global Reporting Initiative. The GRI Sustainability Reporting Guidelines, converted to Standards in 2016, have since 2000 become the de facto global standard for companies to report voluntarily on their environmental, social and economic performance and impacts. These are of concern to a wider variety of stakeholders having a range of sustainability concerns, but were never designed for reporting to a specific stakeholder category, such as investors. Since about two decades ago, when the acronym ESG was born and the UN Principles for Responsible Investment were founded, institutional investors have increasingly shown welcome interest in company disclosures about what they call ESG performance – matters that may represent risk to a company’s future financial returns and portfolio value. This does not necessarily equate with concern about a company’s impacts on the planet and society, except to the extent that such impacts may, at some stage, boomerang back as impacts on a company’s business model for value creation.

The advent of initiatives by bodies such as the IIRC, SASB and the TCFD has focused attention on E&S related disclosures and board (governance) oversight thereof that would be deemed material to investor decisions. The new question, therefore, is whether the GRI and its widely used sustainability reporting standards will, in future, continue to be recognized as the overarching set of standards about issues that matter to society in general, i.e., stakeholders concerned about the future of the planet and society.  If so, how will the new ISSB standards, as well as VRF outputs, align with the GRI standards? The GRI has been granted a “liaison” status with the IFRS Foundation’s Technical Readiness Working Group, but it seems unclear how the GRI and its standards will be recognized and positioned in the future reporting landscape, depending on whether the ISSB will someday broaden its scope to this wider realm of sustainability reporting hitherto occupied by the GRI.

A further possible sideways step is that, early in July, the GRI formally agreed with the EU’s EFRAG Project Task Force to cooperate in developing the sustainability reporting standards for the EU’s upcoming Corporate Sustainability Reporting Directive, which aim to meet the disclosure expectations of both investors and wider stakeholders (the EU’s “double materiality” concept). It would be unfortunate if, at the end of all this exciting progress toward convergence in global sustainability reporting standards, we ended up with the IOSCO-supported ISSB standards for investor purposes in much of the world, plus a similar but not identical set of standards for the European Union and its member countries, and yet a third set in the US introduced by new SEC rules. Where then would the GRI Standards fit in such a landscape?

Great progress in many ways, but still some important questions up in the air. Three steps forward but one or two sideways? Let’s hope the choir all gets onto the same page as this chorus unfolds.



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