The International Financial Reporting Standards (IFRS) Foundation plans to propose a new set of sustainability standards by the end of September with the goal of establishing a sustainability standards board at the UN Climate Change Conference COP26 in November.
As the current practice of sustainability disclosure is inefficient and sometimes ineffective due to a lack of commonly accepted standards, there were several calls last year for the IFRS Foundation to get involved in achieving greater consistency in sustainability reporting.
In July 2020, Eumedion, a Dutch corporate governance group, called on the IFRS Foundation to establish an international non-financial reporting standards board.
In September 2020, the International Federation of Accountants argued similarly that “the IFRS Foundation, with an enhanced remit and composition, should create an international sustainability standards board, leveraging the independence and success of IFRS governance to develop global standards and rationalize the current fragmented ecosystem”.
In response to the call, IFRS Foundation trustees issued a consultation paper asking how it should play a role. The trustees received 576 comment letters from a diverse set of organizations and individuals from around the world. The responses indicated strong recognition that urgent steps needed to be taken for the harmonization of standards and that there was an overwhelming demand for the IFRS Foundation to play a role.
However, despite the good will, standard-setters – including the Global Reporting Initiative (GRI), the Climate Disclosure Standards Board (CDSB), the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), the CDP (formerly, the Carbon Disclosure Project) and the IFRS Foundation – have to overcome their conceptual differences surrounding materiality, something on which they differ as they have different target audiences.
On the one hand, some focus on information about the climate change impact on the reporting entity, as this would support investors and other market participants to make better decisions. On the other hand, some developed standards adopt the principle of double materiality, under which the reporting entity’s impact on the wider environment would also be disclosed.
In its consultation paper, the IFRS trustees clearly stated that they would initially focus their efforts on the sustainability information most relevant to investors and other market participants, instead of applying the double materiality principle.
They argue that taking a double materiality approach at the first stage would “substantially increase the complexity of the task and could potentially impact or delay the adoption of the standards”.
The GRI, taking an alternative view, replies in its comment letter, “we note that this will, almost by definition, not include all sustainability information relevant to investors and other market participants”. In support for its view, the GRI quoted the European Union’s promotion of the double materiality concept in the Non-Financial Reporting Directive.
Apart from distinct conceptual understanding on materiality, standard-setters also need to manage their differences in ranking sustainability-related risks when synchronizing their disclosure standards.
In its consultation paper, the IFRS Foundation states that the SSB would “prioritize climate-related risk because of its urgency but it could also consult on other environmental priorities”.
However, such an approach risks ignoring the demand for a comprehensive solution that recognizes the important interrelationships between environmental, social and governance (ESG) factors in investment decision-making.
For example, impacts of climate change are likely to create business model disruption among electric utilities, giving rise to knock-on risks more closely associated with social issues, such as access to and affordability of energy. Once such social issues get governments’ attention, regulators step in and introduce regulatory risks to the sector, materially impacting the financial profile of the industry.
Therefore, having developed a body of 77 industry-specific standards, SASB counter-proposes to the trustees that the SSB should “establish standards for the full range of sustainability issues relevant to enterprise value creation, which are likely to be industry-specific in nature”.
Nevertheless, recent initiatives aiming to harmonize the ESG reporting ecosystem allow future collaboration to leverage previous work, instead of reinventing the wheel.
In September 2020, the World Economic Forum’s International Business Council, in collaboration with the Big Four accounting firms, released its recommended set of universal ESG metrics and disclosures that they believe companies can report on regardless of their industry or region.
In the same month, SASB, IIRC, GRI, CDP and CDSB jointly announced plans to align their standards more closely in the Statement of Intent to Work Together Towards Comprehensive Corporate Reporting. In that statement, the organizations reported that they would welcome the prospect of working with the IFRS Foundation.
Since then, SASB and the IIRC announced that they intent to merge together into a group called the Value Reporting Foundation by the middle of 2021, and the CDSB may be joining them as well.