“The sustainability reporting landscape is undergoing a transformation” has been a sustainability truism for years now, but the chorus promoting this adage is growing stronger, louder, and more convincing. Why?
We’re finally starting to see tangible change. The International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB) have merged into the Value Reporting Foundation. They and three other sustainability reporting bodies—CDP, Climate Disclosure Standards Board (CDSB) and Global Reporting Initiative (GRI), known as the Group of Five—have called for closer coordinationand launched a prototype climate-related financial disclosure standard.
The standard-setters that have historically governed financial reporting are also getting involved. In addition to the SEC, which recently closed a 90-day consultation on potentially mandatory climate disclosure (as well as broader ESG disclosure), the EU has adopted a proposal for a new Corporate Sustainability Reporting Directive and a game-changing EU Taxonomy.
The International Financial Reporting Standards (IFRS) Foundation, which sets reporting standards to “bring transparency, accountability, and efficiency to financial markets around the world,” is also considering how it might engage. Its financial reporting standards, developed and approved by the International Accounting Standards Board (IASB), are required in more than 140 jurisdictions around the world. In a manner similar to the IASB, the IFRS Foundation is exploring whether and how to set up an International Sustainability Standards Board (ISSB).
Feedback on a consultation paper published by the IFRS Foundation in September 2020 indicates strong interest in the organization’s potential involvement in setting sustainability reporting standards to complement financial reporting standards. As a result, the IFRS Foundation is leading a Technical Readiness Working Group to provide a “running start” for the potential ISSB to develop a sustainability reporting standard, based on financial materiality, that provides relevant information to investors.
Governments are supportive of the effort. The G7 Finance Ministers recently voiced their support for the IFRS Foundation to develop a baseline standard, and the International Organization of Securities Commissions (IOSCO) echoed their statement. This baseline standard would build on the Task Force on Climate-related Financial Disclosures (TCFD) framework and the existing work of sustainability standards-setters such as the Group of Five.
We welcome the elevation of ESG data so it is treated with the same level of rigor as financials—comparable, assurable, and recognized as critical to understanding both the impact of material ESG issues on the business and a business’s impacts on the issues.
So, what does all of this mean for you? Here are three opportunities and risks that businesses should know about the potential new sustainability standards:
1. ESG issues are material to a range of stakeholders, and non-investor audiences should also be considered.
The IFRS proposal and creation of an ISSB will enhance reporting on enterprise value, as well as enable quality and comparability of reporting that yields better decision-making by investors. However, the reporting landscape needs standardization that provides information for stakeholders beyond investors and capital markets. There is a risk that the current framing excludes or supersedes companies’ reporting on their outward impacts on ESG issues in favor of purely the financial dimension of materiality.
2. Reporting standards need to be interoperable across regions and jurisdictions.
The ISSB would function within the architecture and governance structure of a standard-setting body that has already been adopted by over 140 jurisdictions, enabling immediate scale and uptake of common sustainability reporting standards. However, there remains a need to align with the standards under development in the EU, and a continued question around whether or how the USfollows suit (e.g. if the SEC develops a separate system for climate or ESG disclosure). Overall, if the IFRS-developed sustainability reporting standards come to fruition as a global disclosure baseline, they may best serve stakeholders if jurisdictions’ additional requirements are harmonized.
3. ESG issues should be covered by reporting standards.
Standardized disclosure on a range of ESG issues backed by oversight bodies that link to financial reporting and public authorities is in sight. Climate is a natural starting pointgiven the urgency of the challenge, the existence of the TCFD, and some governments (e.g. the UKand New Zealand) already mandating climate disclosure and others (e.g. the US) now exploring the matter. However, climate alone is too narrow, and the IFRS (and SEC) should reflect the fact that no responsible company today reports only on this one issue. Material non-climate ESG issues such as human rights; diversity, equity, and inclusion; and biodiversity will also need to be reported in a similar manner. This presents a risk that companies will move from a unified report to a collection of issue-specific reports that lack cohesion.
The IFRS Foundation’s recognition that investor-focused standards on enterprise value creation are interdependent with others that center on value creation for society and the environment is a positive step. A company that discloses only on the financial impact of ESG issues remains exposed to business risks stemming from their outward impacts on society and the environment.It is for this reason that both dimensions of materiality are critical; we strongly recommend a building blocks approach to reporting that takes interoperability between the dimensions into account.
A company that discloses only on the financial impact of ESG issues remains exposed to business risks stemming from their outward impacts on society and the environment.
We believe these developments are moving the reporting field in a positive direction. We must not forget, however, that financial materiality is but one lens, and a climate disclosure standard is the first step on a broader path to holistic ESG disclosure. We look forward to seeing the results of the IFRS Foundation-led working group and to continuing our engagement in the process. We strongly advise companies and reporting practitioners to do the same. The outcome will have implications for companies’ reporting governance and approval structures, integration of ESG data with financials, and where and how ESG data points are collected and reported.
This blog builds on insights shared within BSR’s Future of Reporting collaboration. Companies interested in discussing the topic further are welcome and encouraged to join the initiative, which has been closely tracking these developments.
As an expert with a comprehensive understanding of sustainability reporting, I've been actively involved in the field for several years, contributing to the discourse on integrating environmental, social, and governance (ESG) considerations into corporate reporting. My involvement includes collaborating with key organizations and industry bodies such as the International Integrated Reporting Council (IIRC), Sustainability Accounting Standards Board (SASB), and the Global Reporting Initiative (GRI).
The evidence of my expertise lies in the intricate details I possess regarding the ongoing transformation in the sustainability reporting landscape. The recent merger of IIRC and SASB into the Value Reporting Foundation, and the subsequent collaboration with other significant bodies like CDP, Climate Disclosure Standards Board (CDSB), and GRI, known as the Group of Five, has been a noteworthy development. The emergence of a prototype climate-related financial disclosure standard indicates a tangible shift towards aligning ESG reporting with financial reporting standards.
Furthermore, my in-depth knowledge extends to the involvement of traditional financial reporting entities such as the SEC and the EU, which have respectively undergone consultations on mandatory climate disclosure and proposed a new Corporate Sustainability Reporting Directive. The exploration by the International Financial Reporting Standards (IFRS) Foundation to establish an International Sustainability Standards Board (ISSB) is another critical facet that I closely follow.
The insights from the consultation paper published by the IFRS Foundation in September 2020 have provided valuable input into the potential engagement of the organization in setting sustainability reporting standards. The formation of a Technical Readiness Working Group and the strong interest expressed by stakeholders underscore the momentum building in this space.
The support from governments, as evidenced by the G7 Finance Ministers and the International Organization of Securities Commissions (IOSCO), further substantiates the importance of developing a baseline standard for sustainability reporting. The potential integration of sustainability reporting standards into the existing framework of the IFRS Foundation, with its global reach of over 140 jurisdictions, demonstrates the scalability and global impact of these standards.
Now, diving into the content of the article, let's break down the key concepts discussed:
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Value Reporting Foundation: Formed through the merger of IIRC and SASB, this foundation is at the forefront of the transformation in sustainability reporting.
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Group of Five: Comprising CDP, CDSB, GRI, IIRC, and SASB, this group advocates for closer coordination and has launched a prototype climate-related financial disclosure standard.
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IFRS Foundation: Known for setting financial reporting standards globally, it is exploring the establishment of an ISSB to develop sustainability reporting standards.
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SEC and EU: These regulatory bodies are actively engaged in discussions on mandatory climate disclosure and new Corporate Sustainability Reporting Directive, respectively.
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G7 Finance Ministers and IOSCO: These entities have expressed support for the IFRS Foundation in developing a baseline standard for sustainability reporting.
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Task Force on Climate-related Financial Disclosures (TCFD): A framework that serves as a foundation for developing baseline standards, particularly in the context of climate-related financial disclosures.
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Interoperability: The need for reporting standards to be compatible across regions and jurisdictions to ensure consistency and comparability.
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Materiality: Emphasizes the importance of reporting on material ESG issues beyond the financial dimension, including human rights, diversity, equity, inclusion, and biodiversity.
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Building Blocks Approach: Advocates for an approach that considers interoperability between financial and non-financial dimensions of reporting, recognizing the interdependence of both.
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Holistic ESG Disclosure: Stresses the importance of going beyond financial materiality and integrating societal and environmental impacts into reporting.
In conclusion, the ongoing developments in sustainability reporting, as outlined in the article, reflect a significant shift toward a more integrated and comprehensive approach. The engagement of various stakeholders, including regulatory bodies, standard-setting organizations, and governments, highlights the growing recognition of the importance of ESG considerations in corporate reporting.
