I was initially enthusiastic when the International Sustainability Standards Board (ISSB) was announced back in 2021. Great, I thought; at last we will have meaningful environmental standards coming from inside a respected body (the IFRS Foundation). The status quo was an appalling mess of overlapping and unsatisfactory acronyms. This wasn’t just hard to navigate for investors; it was also hard for companies to implement without resorting to reams of turgid boilerplate.
I was also encouraged by the commitment to deliver standards that are ‘cost-effective, decision-useful and market informed’. The ‘decision-useful’ bit especially appealed to me. Searching for decision-useful information in sustainability reports can be both tedious and fruitless.
The other thing that appealed to me was the goal to deliver sector-specific standards. Regular accounting is based on the sound principle that IFRS Standards can be applied to all companies, with the partial exception of insurance.
Almost nothing that I would like the ISSB to do has anything to with financial reporting
The Sustainability Accounting Standards Board (SASB) – which has now been rolled into the ISSB – was the only body to have produced sector-specific standards, 77 in total. This was a great idea in theory but the actual standards were (in my experience) woefully inadequate. When I started doing research for environmental charities, I struggled to find any useful information in the SASB reports. The standards themselves are riddled with holes and omissions. I will return to this in a future article.
Fundamental mismatch
I have come to think that there is a fundamental mismatch between accounting and sustainability reporting. Accounting is largely backward-looking and is solely about money. Even the forward-looking parts are based on taking current numbers and projecting them forwards. One can argue that risk statements are genuinely forward-looking but these tend to be generic boilerplate.
Sustainability is not about numbers and not about money. In my view, sustainability is all about behaviour, both today and in the future. It is also about choices and decisions. What companies choose not to do can be even more important than what they choose to do.
Getting companies to behave better is partly down to government legislation but financial markets can also play a vital part. Investors will generally avoid companies that are behaving unsustainably (in the broader sense of the word), although dirty companies can generate great returns in the short term.
The planet needs action not metrics
I think the aim of sustainability standards should be to raise the cost of capital for dirty companies and lower it for clean ones. An important subsidiary aim is to help investors determine the direction of travel for each company. Buying shares in an out-of-favour dirty company with a credible plan to become sustainable can be a great investment.
To achieve this goal, such standards have to address the real issues facing each sector, not just require a stream of historical metrics. Some companies already do this well. The 2024 annual report of IAG (the parent of British Airways) contains an excellent discussion on how it hopes to get to net zero by 2050. I can quibble with the details but at least there is a robust foundation for engaging with investors. Note that all this disclosure is voluntary.
All of this leads me to wonder whether the ISSB really belongs inside an organisation primarily focused on accounting. Almost nothing that I would like the ISSB to do has anything to with financial reporting. I can see a big role for the accounting profession in environmental assurance, which is currently entirely unregulated, but I think the whole approach of treating sustainability as a sub-set of accounting is misguided. The planet needs action, not metrics.
Peter Reilly writes here in a personal capacity and the views expressed are his own
