There are numerous sustainability reporting frameworks globally however there is no one framework that is mandatory. Therefore, quite often it is a case of comparing apples with pears when trying to evaluate companies against one another, however, there is an opportunity for this to change.
The International Financial Reporting Standards Foundation (IFRS Foundation) is a non-profit organisation that oversees financial reporting standard-setting. Its function to date has been to create and promote financial reporting standards. However, to tackle this problem, at COP26 in 2021, it announced the creation of a new standard-setting board, the International Sustainability Standards Board (ISSB). Its purpose is to provide a baseline of sustainability-related disclosures to help investors make more informed decisions.
What is happening?
The newly formed ISSB, chaired by Emmanuel Faber, former CEO of Danone, launched a consultation on its first two standards in March 2022 with the aim of issuing two new standards by the end of the year. These newly proposed disclosure frameworks would be built onto existing TCFD and SASB standards (see below for the glossary), but also incorporate new requirements, including the requirement that sustainability data should be disclosed together with the financial information, rather than in a different report.
Almost 6001 institutions have replied to the now closed consultation. Amongst the responders were the 'Big Four' (KPMG, EY, Deloitte and PWC) and the most valuable company in the world, Saudi Aramco, as well as many asset managers and governmental organisations. The wide range of respondents highlights the interest in these frameworks. On a recent podcast, the Vice-Chair of ISSB, Sue Lloyd, mentioned that almost 32,000 people have been involved in these consultations2.
Whilst most of the feedback has been positive, there are different opinions on the specifics – such as the requirement to disclose scope 3 emissions, which some respondents noted as problematic given the difficulty for companies to obtain accurate data3. The ISSB will now have a little under four months to consider all the feedback and come up with the final shape of these standards.
Why is this important?
As previously mentioned, there is a multitude of reporting standards as well as companies disclosing sustainability data without following an external standard. This can lead to difficulty in making like-for-like comparisons.
What ISSB is offering is a well-rounded set of disclosures which builds on existing frameworks, hopefully making sustainable reporting more comparable and reducing the number of reporting standards starting by combining TCFD and SASB. This could not only help investors make better informed investment decisions, but also help companies by providing a clear way of reporting sustainability-related data.
What happens next?
Once the frameworks are published, they will become immediately available for voluntary adoption. Voluntary disclosure tends to attract the best performing companies whilst laggards tend not to be the earliest adopters.
Currently listed companies in the UK are required to disclose in line with TCFD requirements. The FCA has been very supportive of the ISSB, and it is likely that this will end up replacing TCFD.
The actual adoption and enforcement of this standard will be up to each government. We can already see a rise in interest; on 1 August 2022, in a letter by Lord Callanan 2, the UK Government reiterated their ambition to become the first country to adopt these standards. This could mean that standardised reporting is much closer than we thought.
Glossary
CDP: CDP is an international non-profit organisation based in the United Kingdom, Japan, India, China, Germany and the United States of America that helps companies and cities disclose their environmental impact.
GRI: The Global Reporting Initiative is an international independent standards organization that helps businesses, governments and other organisations understand and communicate their impacts on issues such as climate change, human rights, and corruption.
IFRS: International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board.
ISSB: The International Sustainability Standards Board is a standard-setting body established in 2021-2022 under the IFRS Foundation, whose mandate is the creation and development of sustainability-related financial reporting standards to meet investors' needs for sustainability reporting.
NFRD: Non-Financial Reporting Directive – sets out the rules on disclosure of non-financial and diversity information by large companies.
SASB: The Sustainability Accounting Standards Board is a non-profit organization, founded in 2011 by Jean Rogers to develop sustainability accounting standards.
SFDR: The Sustainable Finance Disclosure Regulation is a European regulation introduced to improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around sustainability claims made by financial market participants.
TCFD: The Task Force on Climate Related Financial Disclosures provides information to investors about what companies are doing to mitigate the risks of climate change, as well as be transparent about the way in which they are governed.
Ramón Secades
Responsible Investment AnalystIn my role as Responsible Investment Analyst, my focus is on engaging with companies and boards to better understand how they manage ESG (environmental, social and governance) risks and opportunities, as well as contributing to our active ownership (voting and engagement) agenda.
Responsible investment
At Quilter Cheviot we see responsible investment as a process that analyses ESG data to help inform investment decisions and to ensure that all relevant factors are accounted for when assessing risk and return.
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