The desire of stakeholders to have increased information from entities is a constant theme in financial reporting. It can be seen in the various regulatory projects relating to disclosures from accounting standards to corporate governance and certainly in relation to sustainability, as previously discussed in this column.
Investors have become increasingly focused on sustainability and want a clear set of comparable information on environmental and social risks that could affect the value of businesses.
During the recent COP26 summit in Glasgow, the IFRS Foundation announced its proposed way forward, looking at three plans:
- To form a new board, the International Sustainability Standards Board (ISSB), to be responsible for the development of international sustainability disclosure standards
- To consolidate two existing sustainability standard-setters into this new board
- To publish two prototype standards: one on climate-related disclosures and one on more general sustainability issues.
Of these plans, the first two can be considered here together; the third will be discussed in my article next month.
These standards will need to be adopted by national regulators, which will involve a great deal of education, training and enforcement
The new board
The ISSB has the job of creating this new set of disclosure standards, which will be called IFRS Sustainability Disclosure Standards. This is quite a mouthful but simplifying it to IFRS SDS is probably no more helpful. If it’s one thing that accountants could use at times, it is an exercise in branding.
These standards will aim to produce a global baseline for sustainability disclosures and are aimed at being compatible with other jurisdiction-specific requirements, such as the EU’s planned Corporate Sustainability Reporting Directive.
As noted in the second plan, this board will consolidate the Value Reporting Foundation and the Climate Disclosure Board, making both part of the IFRS family under the new board. It is hoped that this consolidation will help the ISSB to become the global standard-setter for sustainability measures for the capital markets.
A wider impact
The ISSB is backed by the International Organization of Securities Commissions, which believes that the board is the most credible mechanism for creating the international benchmark that is really needed in this area.
Even though we accountants know how essential we are to the world, we must also accept that it’s not just up to us, and that any meaningful impact must have wider support. With that in mind, it is good to see the reaction to the announcement of the creation of the ISSB.
The announcement was publicly welcomed by finance ministers across 38 countries, from all six continents. As the IFRS Foundation is embarking on an effort to produce something that can be recognised globally, it will need such support if the proposals are to really carry any weight.
The plan also appears to have support within the accounting profession. Bill Thomas, global chair and CEO of KPMG, called the development a watershed moment for sustainability disclosure standards. ‘You can’t change what you can’t measure,’ Thomas said, ‘and the creation of globally consistent and transparent sustainability disclosure standards will strengthen our capital markets by helping investors and business leaders make better decisions and refocus their dynamism on long-term value creation.’ (See also ACCA chief executive Helen Brand’s response.)
The ISSB is set to begin its work in 2022, but the widespread adoption of any new standards is likely to take quite some time. These standards will need to be adopted by national regulators, which will involve a great deal of education, training and enforcement in all jurisdictions. With that in mind, the ISSB intends to be a truly global body, with offices in each continent.
It may be an unintended consequence but the accounting nerds among us may be interested in seeing the progress of this, particularly in the US, where the ISSB will have offices. If these standards become adopted by the US, as hoped (and the US was one of the countries welcoming the announcement), it could result in the long hoped for (in some corners) convergence of IFRS and US GAAP to be reignited. (See also Jane Fuller’s Nov column.)
The creation of the new body appears to be every bit as ambitious as the creation of IFRS Standards 20 years ago. While IFRS Standards aimed to improve financial reporting, the hope is that the new Sustainability Disclosure Standards will not only improve that but play a part in moving towards an overall healthier future.