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Climate a Priority for a New Sustainability Reporting Standards Board

By Tom Ravlic

Chief Financial Officers will be able to discard multiple sets of guidance on sustainability reporting in coming years when a new body begins the process of pulling together one set of reporting standards for the world.

The International Financial Reporting Standards (IFRS) Foundation has issued a public statement in the past fortnight that heralds the start of a process designed to create a single set of sustainability reporting standards.

It is the first significant move by a global authority to set a single set of sustainability standards in a similar fashion to the way in which international accounting standards began to be set in 2001.

The International Accounting Standards Board has been at the forefront of that effort for more than two decades and the IFRS Foundation has now moved accelerate efforts to rationalise the number of frameworks that deal with environmental, social and governance reporting.

Global regulators have helped push the initiative along through the International Organisation of Securities Commissions (IOSCO) and the global network for regulators has supported the IFRS Foundation’s approach.

IOSCO was one of the major influences in the adoption of international accounting standards and it has urged the IFRS Foundation to make starting the development process a priority.

“There is an urgent demand to improve sustainability reporting in a way that meets market needs. I believe that IOSCO is in a unique position to underpin market acceptance of high-quality sustainability disclosure standards by endorsing the system architecture for sustainability standard setting under the IFRS Foundation – just as we did 20 years ago when we endorsed IFRS financial reporting standards,” Ashley Alder, the IOSCO chair, observes.

Global regulators are leaning on the international standard setting foundation to forge ahead with guidance on reporting on sustainability at a time when the Biden Administration is forcing its own government agencies to produce better reports related to the reduction of climate pollution.

“It is essential that agencies capture the full costs of greenhouse gas emissions as accurately as possible, including by taking global damages into account. Doing so facilitates sound decision-making, recognizes the breadth of climate impacts, and supports the international leadership of the United States on climate issues,” President Biden notes in his executive order related to climate change. “The “social cost of carbon” (SCC), “social cost of nitrous oxide” (SCN), and “social cost of methane” (SCM) are estimates of the monetized damages associated with incremental increases in greenhouse gas emissions.”

These measures, according to the President’s executive order, should include as assessments of the impacts of climate change on agriculture, human health, damage to properties from natural disasters such as floods and ecosystem.

A single suite of sustainability standards will be set by a new Sustainability Standards Board that will be tasked by the IFRS Foundation to ensure that any guidance developed by the new board is focused squarely on provided information that is useful for investors, lenders and other creditors.

Climate related disclosures will be a key priority of the board when it begins its work although it will work on other areas of environmental, social and governance reporting.

This new body will not start its work without an inventory of guidance to examine. Foundation board members have specified that existing sustainability reporting guidance should be drawn on to inspire the new board’s work.

It is an acknowledgement by the foundation that there are a range of bodies that have worked over several decades to establish guidelines for non-financial reporting.

Such bodies include the Sustainability Accounting Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council, the Climate Disclosure Standards Board and the CDP.

Each of these bodies has technical committees and have worked on separate suites of non-financial reporting guidance. They cooperated in 2020 to produce a paper on reporting enterprise value that contained a prototype standard that highlighted what a climate related financial disclosure standard might look like.

It is an illustration of how complex the task will be as the new standard setter starts to work its way through the self-regulatory tapestry woven by others to determine what threads are appropriate to weave into its own.

A comparison is made between the IASB’s financial reporting conceptual framework, which primarily concerns itself with flows and outflows of resources used to run an entity that are expressed in financial terms, and the frameworks developed by the five bodies that have beavered away on building non-financial reporting disclosure standards that meet a specific market need.

Each framework tackles qualitative characteristics of information such as verifiability, timeliness, understandability in its own way. The challenge for the new standard setter will be how to bring those notions into one unified set of literature that makes sense in its own right.

The IFRS Foundation will be considering the document prepared by these non-financial disclosure standard setting bodies and meet with them to discuss their approach.

There will be a further document issued by the IFRS Foundation that deals with feedback to the consultation on sustainability reporting that led to the recent decisions on strategy.

Setting up a new standard setter also requires the finnicky task of the foundation looking over its shoulder to amend a constitution that was initially set up to deal only with accounting standards.

Real progress in creating a single set of sustainability reporting standards that companies will be able to use across jurisdictions will only be made when this red tape is completed.


Author

Tom Ravlic is an investigative journalist and author, specialising in financial services, corporate governance and legal matters.

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