Carefully coordinated work and diplomacy is taking place to support the global harmonisation of sustainability reporting standards.
Over the spring, as eyes have turn towards economic recovery and key events in the diplomatic calendar – G7, G20 and COP26 – we have seen a series of announcements from the International Financial Reporting Standards Foundation (IFRS); the International Organisation of Securities Commissions (IOSCO); the EU and the Securities and Exchange Commission (SEC) in the US demonstrating significant momentum towards the global harmonisation of these standards.
This is critical from both the investors’ perspective and that of civil society. Companies need to provide investors with robust and comparable data on sustainability factors so these can be truly integrated into the investment process.
A global standard will ensure this comparability, essential for investment managers who invest in companies and assets all around the world, and will support the flow of capital to more sustainable businesses. These disclosures will underpin efforts to transition the economy to net-zero carbon emissions.
These developments are welcome. However, in the race to build this global infrastructure, standard setters must pay attention to three key areas: the complex interaction between ESG factors; the information needs of investors as the providers of capital; and the compatibility of companies and investors sustainability disclosures.
What are the commitments?
Looking at the recent developments in more detail, the IFRS Foundation has committed to amend its constitution and develop a Sustainability Standards Board (SSB), which will be tasked with building on existing frameworks (such as TCFD, SASB and GRI) to develop sustainability reporting standards.
The standards would be focused on information that is material to the decisions of investors, lenders and other creditors, but will take a ‘building blocks’ approach to ensure consistency with key jurisdictions, such as the EU who are ostensibly focused on wider sustainability impacts. It would also take a ‘climate-first approach’ to reflect the urgency of the need for progress on climate change and making use of the ‘climate prototype’ that has been developed by the five major standard setters.
IOSCO has committed in principle to endorse the work of the SSB and stand ready to support it through the establishment of a multi-stakeholder expert consultative committee.
As a part of a comprehensive package of sustainable finance measures the European Commission has made proposals for a new Corporate Sustainability Reporting Directive to revise and strengthen the rules introduced by the non-financial reporting directive.
See also: – PRI calls for more clarity from new EC measures
The proposal asks the European Financial Reporting and Advisory Group (EFRAG) to develop a sustainability reporting standard. EFRAG has also committed to taking a ‘building blocks approach’, which will ensure comparability with the work undertaken by the SSB.
The EU approach will focus on a wider range of information as this is a key focus of its Taxonomy and Sustainability Finance Disclosure Regulation (SFDR). This standard will ensure issuers provide the information to support investor’s disclosures under the EU taxonomy regulation and SFDR.
Our members have been calling for the global harmonisation of sustainability reporting standards for some time. This was a key recommendation of the Asset Management Taskforce report Investing with Purpose.
Now there is momentum towards this, it is essential for standard setters to stay focused on the need for standardisation on the sustainability factors, which will impact on the long-term value of our client’s investments. These disclosures need to be firmly linked back to the strategy, business model and capital management decisions of the investee company so that investors can assess long-term value and support companies, through their stewardship activities, to transition to a more sustainable footing.
We recognise the urgency for better disclosures on climate change and the pragmatism of IFRS Foundation’s climate-first approach. The G7 and COP26 should be key platforms to encourage regulators around the world to mandate TCFD reporting across the economy.
However, it is also essential to recognise the complex interaction between ESG factors and the impact on value creation. This demands a clear and accelerated roadmap towards disclosures on the wider range of sustainability issues from the IFRS Foundation.
Finally, global coordination needs to consider not only the need for harmonisation of issuers sustainability disclosures, but also those of financial institutions, so that information flows efficiently from companies to investment managers and finally to the owners of capital. As global investors, managing assets around the world, on behalf of clients from different jurisdictions, this standardisation is crucial for us to play our role effectively in a sustainable economic recovery.
Sarah Woodfield is stewardship manager at Investment Association and an ESG Clarity editorial panellist.