ESG Investing

New International Sustainability Standards Board Aims to Unify ESG Metrics

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How do investors know they’re investing in companies that genuinely comply with environmental, social, and governance (ESG) principles and make a clear, measurable impact? Announced in November 2021, the new International Sustainability Standards Board (ISSB) intends to help answer that question.

The organization aims to provide a guide to the sustainability disclosures that investors and companies alike need to make in addition to their financial statements. The news could represent a major step toward a long-sought common system of impact measurement. Currently, ESG investors and companies face myriad sustainability reporting standards. These include the Task Force on Climate-Related Financial Disclosures, the Climate Disclosure Standards Board (CDSB), and the Value Reporting Foundation (VRF)—itself a merger of Sustainability Accounting Standards Board and the International Integrated Reporting Council.

The ISSB hopes this work will help tame ongoing uncertainty for investors, regulators, and other interested parties; reduce the costs for companies, who have hitherto been required to create a range of reports with a variety of metrics and formats for different bodies; and help align data for true impact.

Introducing New Global Standards for ESG reporting

The International Sustainability Standards Board is set to be managed by the International Financial Reporting Standards (IFRS) Foundation, a not-for-profit international organization responsible for developing a single set of high-quality global accounting and sustainability disclosure standards known as IFRS Standards.

“The ISSB will develop IFRS Sustainability Disclosure Standards, including disclosure requirements that address companies’ impacts on sustainability matters relevant to assessing enterprise value and making investment decisions,” according to the IFRS announcement. “The standards will be developed to facilitate compatibility with requirements that are jurisdiction specific or aimed at a wider group of stakeholders (for example, the European Union’s planned Corporate Sustainability Reporting Directive as well as initiatives in the Americas and Asia-Oceania).”

The ISSB will operate alongside the International Accounting Standards Board (IASB) and incorporate the CDSB and the VRF. Its standardized ESG reporting is expected to complement the IASB’s financial accounting rules, which already require companies to reference climate risk in their accounts when relevant.

The launch of the ISSB comes as financial regulators around the world continue looking to improve ESG disclosures and reporting.

Simplifying and Unifying Standards

Through unifying an alphabet soup of bodies and regulations, these new international sustainability standards aim to be simpler, more transparent, and more widely accepted than their predecessors. Overseen by the International Organization of Securities Commissions (IOSCO) as part of its role as chair of the IFRS Monitoring Board, the new standards will ultimately focus on ensuring that ESG disclosure is as globally harmonized as general financial reporting. The IOSCO signaled in 2020 that it was not happy with “either the fragmented way private-sector standard setting for sustainability was developing or with the scale of the risk of greenwashing.”

The launch of the ISSB comes as financial regulators around the world continue looking to improve ESG disclosures and reporting. In March, the EU’s Sustainable Finance Disclosure Regulation required companies including banks, private equity houses, pension funds, and asset managers to comply with a range of ESG standards. Then, in September, the SEC wrote to dozens of US public companies asking them to provide more detailed information to their investors about how climate change might impact their earnings and operations.

Determining ISSB Metrics

Ahead of the ISSB’s plans to start work in earnest in 2022, the IFRS has released a draft of climate-related disclosures to be considered over the coming months and potentially made official in the summer or autumn.

As part of this draft, the IFRS’s Technical Readiness Working Group has begun to consider metrics and protocols that may be relevant. In addition to greenhouse gas emissions, these include the amount of capital expenditure, financing, or investment deployed toward climate-related risks and opportunities; the price for each metric ton of greenhouse gas emissions used internally by an entity; and the proportion of executive management remuneration affected by climate-related considerations.

Following the Reception to ISSB

Already, 38 governments have expressed their support for the formation of the ISSB. These include the United States, United Kingdom, several EU states, Mexico, Russia, Saudi Arabia, and Singapore as well as emerging economies such as Nigeria, Paraguay, and Jamaica.

However, critics have debated the relationship between financial reporting and sustainability reporting. SEC Commissioner Hester M. Peirce released a statement in July urging the IFRS Foundation “not to wade into sustainability standard-setting because doing so would (i) improperly equate sustainability standards with financial reporting standards, (ii) undermine the Foundation’s current important, investor-centered work, and (iii) raise serious governance concerns.”

Chair of the IFRS Foundation Trustees Erkki Liikanen pushes back on this concern in the November statement: “to properly assess related opportunities and risks, investors require high-quality, transparent and globally comparable sustainability disclosures that are compatible with the financial statements. Establishing the ISSB and building on the innovation and expertise of the CDSB, the Value Reporting Foundation and others will provide the foundations to achieve this goal.”

The long pursuit of shared, international standards has overseen the creation of many new—and sometimes conflicting—standards. As the effects of climate change take hold with increasing intensity, the ISSB may help bring investors and companies into alignment.

Any company, security, fund or other investment identified herein is provided solely for illustrative purposes and should not be construed as a recommendation or solicitation for the purchase or sale of any such investment.

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