IFRS Foundation Trustee Teresa Ko asks whether there is a need for a global set of internationally-recognised sustainability standards, and what possible role the IFRS Foundation could play in their development. Earlier in May of this year, she delivered a speech at the inaugural meeting of the Green and Sustainable Finance Cross-Agency Steering Group, where she outlined possible future roles the IFRS Foundation could play in supporting progress towards the development of standards for sustainability reporting.
Sir David Attenborough joined Instagram recently and became the fastest person ever to hit a million followers. The 94-year-old’s life work as a naturalist, broadcaster and documentary maker is legendary, but his message that the climate stability that we have enjoyed for 12,000 years is unlikely to continue has never resonated more urgently with so many people. “Our planet is heading for disaster if we do not act now to put it right,” Attenborough says.
Sustainability and climate change are the global challenges of our time. In the world of capital markets, asset management and investing, and amongst investors, preparers, financial markets regulators and policymakers alike, there is a growing and urgent demand to improve the consistency and comparability of the figures, data and information in sustainability reporting.
Over the last decade or so, we have seen many sustainability standards initiatives across numerous sectors. Some say there are actually more than 1,700 different metrics available for companies to use, including initiatives from governments and international organisations that promote climate change reporting.
In 2006, when ‘ESG’ was first mentioned by the United Nation, there was US$6.5tn of funds under management. As of April 2018, this has grown to US$81tn in assets under management with net inflows of US$71bn between April and June of this year. All of this is startling considering that there isn’t even a commonly accepted definition of what constitutes a green finance product! Aside from the risks of cherry picking and ‘greenwashing’, the landscape is increasingly chaotic, inefficient and ineffective in addressing our growing concerns around the complex and critical areas of sustainability and climate related risks. Many corporates lament the frustrations, complexity and costs of having to disclose against multiple standards and metrics, which often add nothing to the quality of data or information being provided.
Many people are trying to do something about this. In just the last four months, we have seen a number of significant developments in this area. In June, we saw Valdis Dombrovskis, Executive Vice President of the European Commission, mandating the European Financial Reporting Advisory Group (EFRAG) to launch technical preparatory work to develop recommendations for a common set of non-financial reporting standards by European companies, taking into account the existing requirements of the Non-Financial Reporting Directive (NFRD).
In August, the CFA Institute, a global association of investment professionals, announced the development of a voluntary, global industry standard to provide greater product transparency and comparability for investors by enabling asset managers to clearly communicate the ESG-related features of their investment products.
Last month, five ESG standard-setters (the Carbon Disclosure Project (CDP), the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB)) pledged to work together towards a comprehensive corporate reporting system. Together with the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD), these organisations guide the overwhelming majority of sustainability and integrated reporting throughout the world.
A week later, the World Economic Forum International Business Council, comprising 130 multinational corporations, released its white paper prepared in collaboration with the Big Four accounting firms. The paper identified a common, core set of ESG metrics and recommended disclosures capable of verification. Its aim was to raise the level of transparency and alignment to build a more sustainable global economy.
On 30 September 2020, the Trustees of the IFRS Foundation published a Consultation Paper to assess demands for a global set of internationally-recognised sustainability standards focusing initially on climate-related risks disclosure, and whether the IFRS Foundation should play a role in developing such standards. As Erkki Liikanen, Chair of the IFRS Foundation Trustees said: this will be a demand driven process.
As one of the 22 Trustees and a member of the smaller Trustee Task Force that worked on the Consultation Paper, I am very excited by one possible option outlined in the paper (among other alternatives that it also considers). This option proposes the establishment of a new Sustainability Standards Board to build on the existing work and developments in the field of sustainability, focusing initially on climate-related matters. The idea is that this new board would operate alongside the existing International Accounting Standards Board (IASB), which sets the IFRS Standards, and under the same three-tier governance structure of the IFRS Foundation.
This proposed new Sustainability Standards Board is not expected to compete with existing regional or national initiatives, but to collaborate with those organisations and bodies who are working in this field and to leverage the deep experience of the IFRS Foundation in developing global standards. This would help to harmonise, standardise and/or consolidate the proliferation of metrics, frameworks and disclosure requirements that exists today.
If anybody is asking how well-placed the IFRS Foundation is to play this role, consider its history: The IFRS Foundation dates back to 1973, when eight accounting bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom, Ireland and the United States joined forces to create the International Accounting Standards Committee (IASC) and agreed to adopt International Accounting Standards (IAS) for cross-border stock market listings. In 1993, the chairman of IAS urged IOSCO to accept IAS in multinational securities offerings and foreign listings. This happened in 2000 when IASC restructured itself into a full-time International Accounting Standards Board, which acted as an independent standard-setting body overseen by independent Trustees who were accountable to the Monitoring Boards of securities regulators and public authorities around the world—i.e. the three-tiered governance structure that still exist today.
Today, the IFRS Foundation remains an independent non-profit organisation that continues to develop a single set of high quality, understandable, enforceable and globally accepted IFRS Standards. In the last 10 years, the IFRS Foundation also enhanced the quality of IFRS Standards by introducing major updates to the accounting for financial instruments, revenue recognition, leasing and insurance contracts. To date, over 140 jurisdictions require the use of IFRS Standards by all or most publicly-listed companies, and a further 12 jurisdictions permit their use.
The Trustees of the Foundation are aware of the enormity of the task of developing a global set of sustainability standards. The Trustees are very clear that building on and working with regional initiatives is a ‘must’ in order to achieve global consistency and reduce complexity and hopefully cost too. Establishing a new Sustainability Standard Board will also be subject to a number of other conditions, including support for separate and adequate funding and appropriate technical expertise for the Trustees, the new sustainability board members as well as the staff needed to support them.
I was pleased to see on the day the Consultation Paper was published, the IIRC, CDP, CDSB, GRI and SASB responded by sending a letter to Erik Thedéen, Director General of Finansinspektionen (Sweden’s financial regulator) and Chair of the IOSCO’s Sustainable Finance Task Force expressing commitment to work closely with IOSCO and IFRS Foundation to achieve the comprehensive corporate reporting system that the world so urgently needs. Specifically, it mentions that IFRS Foundation could provide an appropriate governance architecture to achieve global acceptance.
In the last 20 years, the IFRS Foundation has transformed the global financial reporting landscape. The Foundation’s public interest focus and accountability, full consultation, governance structure and transparent and participatory due process have all contributed towards the achievements of the IFRS Foundation and the IAS Board to date.
Clearly, therefore, the new Sustainability Standards Board must develop a structure and culture that seeks to build effective synergies with existing financial reporting. This should give the IFRS Foundation an added advantage in playing a key role in the field of sustainability reporting. It would not be right to emphasise one form of reporting at the expense of another. The two sets of reporting requirements do not exist in isolation—both should be developed in parallel, but with a high degree of correlation with each other in order for financial reporting to incorporate the financial impact of sustainability factors. Approached in this way, everybody would benefit from the useful and globally comparable information and data that would result.
In many uncanny respects, the state of sustainability reporting around the world mirrors the state of financial reporting before the IFRS Foundation was formed. We now have another opportunity to shape the way in which sustainability disclosure can be conducted on a global basis. We must seize that opportunity given the urgency and importance of climate-related risks and their effects on reporting entities.
The Consultation Paper invites detailed comments from stakeholders on a number of issues, including how the IFRS could aid the adoption and consistent application of Sustainability Standard Board standards globally; whether to have a focused definition of climate-related risk or consider broader environmental factors; whether sustainability information should be auditable or subject to external assurance and whether to adopt a gradual approach or commence with a double materiality approach.
Encourage as many stakeholders as possible to respond to the IFRS Foundation’s Consultation Paper. The consultation period ends on 31 December 2020.
Remember the words of Sir David Attenborough: “We cannot be radical enough and the time for a global solution is now…”
Note: The opinions expressed in this article are those of the author.