The importance of setting global standards for sustainability reporting cannot be overemphasised, and although the world is well positioned to implement such standards, strong governmental support must be the driving force
On 30 September 2020 the IFRS Foundation Trustees published a Consultation Paper on Sustainability Reporting. It proposed that the foundation establish a Sustainability Standards Board that would sit alongside the International Accounting Standards Board. Just as the IASB had established International Financial Reporting Standards used by all major countries in the world (except the United States, which uses US Generally Accepted Accounting Principles established by the Financial Accounting Standards Board), the SSB would set standards for sustainability reporting.
These standards would have the same degree of rigour, comparability and governmental support as those for financial reporting. To date, sustainability reporting has been a confusing array of well-meaning non-governmental organisations working to establish frameworks and standards for sustainability reporting and with almost no governmental support. The trustees received 577 comment letters and overwhelming support for this idea, including one I submitted with my Oxford colleague Richard Barker.
In March, the trustees announced the strategic direction and next steps for establishing the SSB. A working group was formed, composed of the Value Reporting Foundation (the pending merger of the International Integrated Reporting Council and the Sustainability Accounting Standards Board), the Climate Disclosure Standards Board and the International Business Council of the World Economic Forum. This group would provide recommendations, including further developing those made by the Task Force on Financially Related Climate Disclosures, to set standards for climate-related reporting and other sustainability topics. The trustees plan to formally launch the SSB at the United Nations Glasgow climate conference in November.
For the SSB to be a truly global standard setter it will need global governmental support. Indications here are positive. The International Organization of Securities Commissions has pronounced strong support. Also key is the response from Europe and the US. The European Financial Reporting Advisory Group’s Project Task Force has issued its final report to prepare for “the elaboration of possible EU non-financial reporting standards in a revised EU Non-Financial Reporting Directive”. The European Union has not yet indicated whether it will support the SSB or establish its own set. It plans to announce its standards in April 2022, so a decision needs to be made soon. It would be a shame, and potentially fatal to the SSB, should the EU decide to go its own way.
The preliminary rhetoric from the US is positive. However, compared to the EU, at the governmental level the US is a very new player in the game, and this is only possible thanks to the Biden administration. Several regulatory and perhaps legislative issues must be sorted on a topic that is more ideological than rational in that deeply polarised country.
With strong support from the EU, US and major Asian countries such as China and Japan, the world can have a global set of standards for sustainability reporting. The importance of this cannot be overemphasised. Imagine a world without mandated standards for financial reporting – we would not have the deep and liquid capital markets we have today. But these capital markets are imperfect from a sustainable development perspective. Changing this requires information on sustainability performance that can be incorporated into capital allocation decisions by companies and investors. This information is a necessary, although certainly not sufficient, condition for creating an environmentally sound and socially just world.
Will establishing these standards be difficult? Of course. But the same was true when financial accounting standards and reporting requirements were first developed. Views will vary on which environmental and social issues should be covered by the SSB, and on how best to measure and report on a particular topic. Standards are social constructs, not something derived from the laws of physics. They are a social consensus about the metric that will be used to inform decision-making. Yes, they should be as accurate as possible, but often there will be no definitive ‘right’ answer. What is important is that there is a reasonable answer that is used by everyone.
The issue of standards for sustainability reporting is both arcane and mundane and yet politically charged. For these standards to come into existence and be used by companies, investors, governments and other stakeholders requires strong governmental support. I urge the G7 to make supporting them one of its priorities.