At the 2021 United Nations Climate Change Conference (COP 26) in Glasgow, the IFRS Foundation Trustees announced significant developments to provide the global financial markets with high-quality disclosures on climate and other sustainability issues.
Last twelve months journey of sustainability reporting
As discussed in our various previous articles around the subject of sustainability, capital markets have a key role to play in relation to sustainability issues.
Voices have been raised that are warning about greenwashing and criticising the missing comparability and intransparency of standards and ratings. The capital markets can only address these issues efficiently and effectively as well as take up their role with high-quality disclosures on climate and other sustainability issues. Therefore, it is fundamental that reliance can be placed on such reporting through assurance of quality and global comparability in a similar way as reliance is today placed on financial information reporting.
Under this premise, a bit over a year ago a project on sustainability-related reporting was initiated by the IFRS. This undertaking was part of its periodic strategy review and a consultation paper was published in September 2020. The purpose was to determine if there exists a need for global sustainability standards, whether the IFRS Foundation should play a role and if so, what scope the role should have. It was confirmed that there existed an urgent need for global sustainability reporting standards and there was wide support for the Foundation to play a role in the development of such standard. After a feedback period, an exposure draft was published for consultation in April 2021 and the Trustees published the new Constitution as part of the announcement of the COP 26 conference in November 2021.
The future of sustainability reporting
At the COP 26 in Glasgow, the following announcements were made by Erkki Liikanen, Chair of the IFRS Foundation Trustees, as part of his speech ‘A Financial System for Net Zero’:
- The formation of the new International Sustainability Standards Board (ISSB with the purpose to develop a comprehensive global baseline of sustainability disclosure (IFRS Sustainability Disclosure Standards). The ISSB will work closely with the IASB and will sit alongside it, within the IFRS Foundation. Switzerland has proposed Geneva as the headquarters for the ISSB.
- A commitment that there will be a complete consolidation of the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) into the IFRS Foundation by June 2022.
- The publication by the Technical Readiness Working Group (TRWG) (working group representatives came from: CDSB, IASB, TCFD, VRF, World Economic Forum, IOSCO and Technical Expert Group of securities regulators) of two prototypes: one on climate-related disclosures and the other on general sustainability disclosure requirements that consolidated key aspects of the working group members content into one unified set of recommendations for consideration by the ISSB.
The goal is that these standards will form a comprehensive global baseline of sustainability disclosure and provide investors with the high-quality global comparability they require.
As emphasized by Erkki Liikanen in his speech: “We will move diligently, but with pace.”
The steps to undertake to get ready for sustainability reporting
The pace will be fast as mentioned above and therefore it is the time now to start preparing for these new set of rules.
Prior to the ISSB’s standards being issued (currently the indication is, that the first standards will be issued by the end of 2022), it is recommended that companies should start preparing for these new standards by using existing sustainability disclosure guidance such as:
- TCFD Recommendations
- CDSB Framework
- Integrated Reporting Framework
- SASB Standards
- WEF Stakeholder Capitalism Metrics
If the institution has not already been using sustainability disclosure standards, a good starting point are probably the TCFD, CDSB and WEF as these groups are also involved in the TRWG and therefore will influence the new standards. It is certain that sustainability will become even more important as expressed by Anand Mahindra “Sustainability has to be a way of life to be a way of business”.
Is your business ready for this new way of life?