Support from investors is key to the success of the International Sustainability Standards Board

Oxford University professors Richard Barker and Bob Eccles describe the key success factors of the International Sustainability Standards Board, which was announced at COP26. They say investors need to visibly and vocally encourage businesses and regulators to support the ISSB.

On November 3 at COP26, the IFRS Foundation (the Foundation) officially announced the formation of the International Sustainability Standards Board (ISSB). He also announced that he would “complete the consolidation of the Climate Disclosure Standards Board (CDSB – an initiative of the CDP) and the Value Reporting Foundation (VRF – which houses the Integrated Reporting Framework and SASB Standards) by June 2022 . ”The ISSB will also draw on the work of the Task Force on Climate-related Financial Disclosures (TCFD).

In addition to this organizational work, the Foundation announced the publication of two prototype disclosure requirements: the “Climate-related Disclosure Prototype” and the “General Financial Information Disclosure Requirements for Sustainable Development Prototype” . These were developed by the Technical Readiness Working Group (TRWG) and are the first two of eight deliverables of a well-structured work program that will lay a solid foundation for sustainability disclosures as rigorous and relevant as those that we have for financial reporting. .

We couldn’t be more thrilled with this monumental step in providing the information investors need to make long-term capital allocation decisions to support sustainable enterprise value creation. This is more than we expected when we published our green paper “Should the FASB and IASB be responsible for setting standards for non-financial reporting?” just three years ago.

Disclosure standards protect investors and support the integrity of global financial markets. As a result, the creation of the ISSB has already received global support, from IOSCO, the international body that brings together global securities regulators, and from the G7, G20 and FSB. The ISSB has also been endorsed by large corporations and global investors, as a pathway to the baseline of necessary global sustainability standards. He will be advised by the multilaterals (OECD, IMF, UN and World Bank).

However, there are still voices that are not as enthusiastic as all of us. Such critics oppose the very name of the ISSB, decry its emphasis on the intersection of sustainability and corporate value, complain about the lack of a conceptual framework, and generally seem to wish it the worst. We tell them, “The ship has sailed. You now have two choices. Accept this reality and engage constructively or keep fishing while the rest of us get on with this important work. “

In this context, we believe that there are four key factors that will determine the success of the ISSB.

The first is to effectively integrate VRF and CDSB into the IFRS Foundation, including establishing a working relationship with the International Accounting Standards Board (IASB). The VRF and CDSB are relatively small and nimble entrepreneurial organizations, and necessarily, given the plethora of sustainability issues emerging in capital markets. The IFRS Foundation, on the other hand, is a well-established body with appropriate deliberative processes. These organizations have different cultures and people with different skills. There will also be the challenge of coordinating between geographies including Frankfurt, Montreal, London, San Francisco, and Asian locations to name. Yet while the integration of mergers is always difficult, there is good reason to be optimistic. All of the amalgamation organizations have a strong sense of shared mission. All of them operate from a common definition of materiality based on the creation of enterprise value. And an appropriate level of funding is put in place so that the ISSB has the financial resources to do its job.

Second, the strong engagement of investors, businesses, auditors and regulators. Investors must visibly and vocally encourage businesses and regulators to support the ISSB. Early news is encouraging based on investor responses to the IFRS consultation and announcements. Most recently, the 62 members in 12 countries and with more than $ 52 trillion in assets under management of the SASB Standards Investor Advisory Group have expressed their strong support for the ISSB and its plans to use the SASB standards as basis for industry-specific requirements, to be developed through the official global procedure for which IFRS are known. It is the responsibility of companies and their auditors to implement the ISSB standards. They must prepare for it. Finally, while the ISSB can establish standards, it cannot impose their use. It is no different from IFRS accounting standards. Jurisdictions around the world, in their own way, must support the ISSB through their corporate reporting rules and regulations. The G20 position is a good start. The UK has already announced that it will create a mechanism to adopt and approve the standards issued by the ISSB. The ISSB’s commitment to providing industry specific information is also a step in the right direction. IOSCO stressed the importance of industry specificity. Its role in blessing standards for cross-border use also makes notable their strong support for the ISSB.

Which brings us to the third key success factor – coordination with jurisdictions involved in their own standardization efforts, in particular the EU and the US. The EU is seeking legislation for its Corporate Sustainability Reporting Directive (CSRD). The SEC will likely issue climate disclosure rules later this year or early next year. What is important is that common topics, such as greenhouse gas emissions, are reported in the same way. Ideally, the ISSB will establish the “global baseline” to which the EU will add itself, and to which the US will aspire. This is what some of the biggest companies in the EU have already said they want. In the European context, this global repository must meet the information needs of investors in a way that complements the EU’s “dual materiality” approach. We appreciate voices calling for information about a company’s sustainability performance that is currently unrelated to creating long-term value for the company, a demand that can be met by regulating a state actor like the EU, or by companies declaring voluntarily using NGO standards such as GRI. Nothing in the ISSB standards will prevent companies from reporting on additional sustainability issues that for some reason are not important to investors. Nor does the ISSB’s proposal prevent jurisdictions, such as the EU, from requiring disclosure on the basis of dual materiality. Those who argue for dual materiality should focus on advocating for governments to impose additional disclosure requirements.

Finally, it is important that the ISSB gets off to a good start. This means the participation of all relevant stakeholders in the official ISSB process to establish standardization priorities, develop a conceptual framework, and expose prototypes and draft standards for public comment. The work of the TRWG has given the ISSB a solid ‘active start’ on all of these elements, but it is important to note that the disclosure requirements of the prototype of the TRWG are not formal exposure drafts, not to mention final documents, as some have suggested. Rather, they are recommendations followed by formal consultation and deliberation by the board of directors, thus following the same rigorous official procedure used by the IASB.

Three years after our Green Paper, we now have the ISSB. Three years from now, we are confident that the world will have an effective ISSB with the strong support of investors and businesses and the institutional legitimacy of regulators. The work of the ISSB will improve capital allocation decisions by companies and investors. Is it a silver bullet? Of course not. But the world will be much better with the ISSB than without it.

Richard Barker is Professor of Accounting and Associate Dean and Robert G. Eccles is Visiting Professor of Management Practice at Said Business School, University of Oxford.

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