SUSTAINABILITY STANDARDS ON THE WAY? [Will we be reporting with a new set of standards beyond 2021?]

On the 29^th of June, Erkki Liikanen, Chair of the IFRS Foundation Trustees, delivered a keynote speech at CFA Institute’s Global Financial Regulatory Symposium titled: “Is There A Path To Global Sustainability Standards?” He talked about the Foundation’s work to meet the information needs of investors and other capital market participants by creating a proposed new board that would develop a global baseline of sustainability-related disclosures focused on enterprise value. Here is an excerpt from that speech. This is the first of a two-part installment.

Introduction 

Today, we are here to talk about sustainability standards, in particular to ask whether there is a path to global standards. Answering this question has occupied much of our time as Trustees of the IFRS Foundation. 

Sustainability reporting is a very broad discipline, ranging from jurisdictional requirements for companies to report against specific public policy objectives to investors’ need for global comparability of sustainability-related financial disclosures. 

These all are important. The focus of IFRS is to meet the information needs of investors. There is a path to global sustainability standards if we, on the one hand, can create a global baseline of sustainability-related disclosures to facilitate comparability for investment decision making and, on the other, work with jurisdictions to ensure compatibility between this global baseline and their own initiatives. 

Coordinated action 

Climate change and sustainability matters are global challenges. They pose particular difficulties for our societies because of different incentives between individuals and society at large. Reversing this dilemma requires global cooperation. The world is preparing for the November COP26 meeting in Glasgow.  

With climate issues, this dilemma is further complicated by what Mark Carney defines three pillars for the solution: 1) public policies, 2) company transition plans and 3) disclosures of climate-related risks and opportunities. 

Achieving goals set out by successive climate summits will require coordinated action by multiple actors, where each one has a distinct role to play.  

Governments are required to establish clear policy frameworks. Investors price investment capital based on how those policies will impact companies in the long term. This in turn provides companies with an incentive to embrace sustainable business models. The efficiency of this supply chain is dependent on high-quality, globally comparable information on which investors can assess sustainability risks and make informed decisions. This is the role of investor-focused international standard-setters such as the IFRS Foundation. The role is to enable the achievement of policy objectives determined by jurisdictions and international agreements by developing standards that bring consistency and transparency for the global capital markets. 

Nobel Laureate Jean Tirole emphasises that economics is a science of means, not of aims. Common objectives of society largely rely on values. Governments determine the objectives. Economics and the market in turn can provide means to meet the objectives at the lowest possible cost. Tirole continues that the market is an instrument, not an aim itself. Similarly, disclosure standards do not set the policy objectives, but they can be a valuable instrument to support the delivery of those policy objectives. 

Demand-driven consultation 

When sustainability reporting can be asked to promote broad public policy objectives, the responsibility belongs to elected bodies and institutions and rightfully so. 

An additional question has been raised: whether global standards would be needed in the more limited task of providing sustainability-related disclosure for investors. This question was often put in front of the IFRS Foundation due to its experience in financial reporting. IFRS standards are required for use by more than 140 countries.  

When the IFRS Foundation and International Accounting Standards Board were founded with IOSCO’s strong support 20 years ago, financial reporting and climate change did not meet. Now, in 2021, it has all changed. 

The first two questions of the consultation paper in September 2020 were: is there demand for global standards? If so, should the IFRS Foundation play a role in developing such standards? 

Overwhelmingly, responses to our initial consultation show a growing and urgent demand for a single set of global sustainability-related disclosure standards. A great number of commentators also wrote that the IFRS Foundation should play a role in developing these standards. 

Source: ifrs.org

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