The International Financial Reporting Standards Foundation (IFRS) has launched a new International Sustainability Standards Board (ISSB) that will establish a shared set of sustainable disclosures across six continents.
The creation of the Board, which had been widely expected, takes the global movement to improve and regularise corporate disclosure on environmental and social issues a step closer to its ultimate aim: fully comparable and legally enforceable disclosure by all companies.
Launched on Wednesday during Finance Day at the COP26 conference in Glasgow, the ISSB has been backed by 37 countries across the world, including Australia, the UK, the US, China, Brazil, and Nigeria.
Since Erkki Liikanen, chair of the IFRS Foundation Trustees, made the anticipated announcement, there has been an outpouring of support for the initiative from those in attendance and elsewhere.
But the project will inevitably raise questions in the weeks and months to come.
“Suffice to say, this is a very positive moment for the markets,” said Jacob Michaelsen, head of sustainable finance advisory at Nordea. “One of the main challenges we are facing in the market today is simplifying the processes, closing the data gap and reducing the bottlenecks
There is huge surge of interest and demand for ESG related data, continued Michaelsen, but it has to come from somewhere.
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To scale investment and find broader alignment in the market in terms of standards practicalities and what to work with, it is important to build some sort of foundation that can actually be used in a global context, he added
“This must come in a manner that is efficient and works for both the users and those that are benefiting from reporting. From what I've been able to gather from the announcement, and from what I've heard in the market, this is really that,” he said.
A global baseline
According to the IFRS, the ISSB has been established to “develop — in the public interest — a comprehensive global baseline of high quality sustainability disclosure standards to meet investors’ information needs”.
The board will also consolidate two investor-focused international sustainability standard-setters, the Value Reporting Foundation (VRF) and the Climate Disclosure Standards Board (CDSB).
“The ISSB will focus on meeting the sustainability information needs of investors for assessing enterprise value and making investment decisions,” said Liikanen. “Its standards will help investors understand how companies are responding to ESG issues, like climate, to inform capital allocation decisions.”
“The standards will form a comprehensive global baseline of sustainability disclosures. They can be used on a standalone basis or integrated into jurisdictional requirements to serve broader stakeholder or other public policy needs.”
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The global baseline approach provides investors with the high quality global comparability they need, while allowing jurisdictions incorporating the global baseline to go further.
Working closely with IFRS on this project was the International Organization of Securities Commissions (IOSCO). The organisation supported the conception of international standards because of regulatory concerns that the flood of funding into state sustainable investments rests on a corporate disclosure landscape that is mainly voluntary and inconsistent.
“Ultimately, that undermines trust in the whole sustainable finance effort, leading to accusations of greenwashing and worries that the vast amount of private finance needed to realise the transition to net zero just won't do the job,” said IOSCO president Ashley Elder.
“The IFRS proposals mean that real economy companies can report on climate issues affecting them under a single global standard issued by a body that will include the leading international standard setting organisations.”
Elder added that IOSCO is convinced that this convergence of standards and standard setters is crucial to enable markets to price climate risk accurately, which in turn supports everything from carbon pricing trends to transition pathways.
In the past, accounting standards have typically flowed from the developed world into emerging markets. Another attendee at the Building a Financial System for Net Zero session on Wednesday was the World Bank, which also welcomed the introduction of the ISSB, stressing the importance of managing this flow and how important the project was for the achievement of that goal.
“In our new climate change action plan, we are ramping up climate finance and action to integrate climate with development,” said Mari Pangestu, managing director of development policy and partnerships at the World Bank.
To achieve that transformation, Pangestu urged for urgency and scale when it came to the $1 trillion or more per annum investment that was needed across the developing world. This investment, she said, would need large-scale mobilisation of private capital that couldn’t just come from public funding.
“International sustainable reporting standards are the key plumbing for attracting capital for sustainable investment in emerging markets,” she said. “The World Bank really welcomes this initiative of the creation of the ISSB.
“If we get it right, we will unlock pots of money – $130 trillion to the low carbon, sustainable economies in the developing world.”
The first step
Of course, this announcement is only the first step in the process of introducing this new project into the financial system.
While clearly positive, it’s unclear whether the market will take hold of the standardised reporting standards when the existing landscape is already a thick alphabet soup of regulations and frameworks.
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“There is a time lag in the market where this needs to get up and running. Some users in the market have just gotten comfortable with T50 and with other standards,” said Michaelsen.
“They may not want to do something completely different, there may be scepticism that needs to be educated away with some sort of hand holding by the experts in the market.”
“Banks and auditors will need to understand the standards and have some time to get up and running in order to really start holding the hands of many of our clients.”
“Today is a very positive and strong announcement and we will for sure feel the effects in the market in the months and years to come.”
Klass Knot from the Financial Stability Board (FSB) confirmed that the organisation has asked the Task Force on Climate-Related Financial Disclosures (TCFD) to monitor the take-up of the ISSB’s recommendations and to publish a further status report in September 2022.
