Next week, the International Sustainability Standards Board (ISSB) is due to release the first of its proposals for non-financial disclosures, an event that could usher a new era for ESG data and reporting.
The ISSB’s creation by the IFRS Foundation at COP26 in Glasgow, Scotland, two years ago offered the promise of a global framework that would show institutions and companies how they should report their ESG performance data.
If the standards are widely accepted and incorporated into regulators’ individual reporting codes, the potential impact could be huge. Corporates would have more clarity on what to disclose and how, making it more likely that they will submit fuller impact and risk reports.
That, in turn, would provide investors with more information to make their own assessments on what companies and projects will best serve their sustainability goals. Most importantly, it will enable greater comparability between ESG datasets, removing the need to use proxy data or estimates, and fostering a greater degree of trust in ESG data and the broader sustainability mission.
In the world of sustainable finance data, technology and regulations, this is a prospect akin to discovering the Holy Grail.
“Common standards globally can only be positive,” said Janine Hofer-Wittwer, head of ESG data and RegRisk services, financial information at data aggregator and trading venue provider SIX. “They are positive for the consistency of the data that we will get from companies and the clarity it brings will hopefully also lead to more companies actually disclosing on sustainability. That will help investors because they will get more data in a comparable format that they can then use.”
Cause for Hope
The ISSB is set to release its first two two sets of standards – the IFRS S1 and IFRS S2 – on June 26. They’ll be unveiled by board chair Emmanuel Faber at the IFRS Foundation Conference in London.
Exactly what they will look like isn’t yet known, but that the board has publicly worked in conjunction with Global Reporting Initiative (GRI) and has indicated it will follow the paths of standard setters such as the Taskforce for Climate-related Financial Disclosures (TCFD) and SASB is giving the industry hope.
The board is supported by the Group of seven Nations (G7), the G20, the Financial Stability Board and more than 40 other organisations, including the International Organisation of Securities Commissions (IOSCO), whose approval will be needed for the ISSB standards to be incorporated into the regulations of individual jurisdictions.
Panagiota Balfousia, head of sustainable business strategy at asset manager Kieger AG, told ESG Insight, said the ISSB’s standards are likely to pave the way towards greater convergence.
“The UK has already indicated it will consider the two ISSB standards for endorsement, and the Securities and Exchange Commission (SEC) has also indicated it may adjust its own proposed climate disclosure requirements to better align with those of the ISSB,” she said, adding that EU’s own first set of draft sustainable reporting standards – the ESRS – were composed “in order to ensure a high degree of interoperability” with the ISSB’s global standards.
From a data management point of view, SIX’s Hofer-Wittwer believes the impact will be felt most by reporting corporates, rather than investors or data vendors. Companies that have so far reported only scant details of their ESG performances may suddenly be confronted with requirements to disclose information they are currently ill-equipped to compile.
Auditors, who have hitherto played a small role in the ESG data space, are likely to be called upon to aid firms in their compliance efforts. That’s underlined by collaboration between the ISSB and the accountancy standards setter the International Accounting Standards Board (IASB) to ensure that its codes can be incorporated into other bodies’ frameworks.
Tax and accountancy form RSM wrote that companies that haven’t yet get a handle on data disclosures should start doing so now.
“When it comes to new reporting procedures, ‘the most important advice is to just start’,” Gidion Lont,assistant manager of ESG consulting in RSM Netherlands, wrote in a blog. Lont urged firms to determine what is material to them, to begin collecting data and start mapping it to a limited number of indicators. Adopting a “mentality of continuous improvement” should be a target, the report added.
ISSB was tasked at its formation with bringing transparency and clarity to a reporting space that comprises a patchwork quilt of voluntary reporting codes. While many share common traits, such as the Taskforce for Climate-related Financial Disclosures (TCFD) and SASB, the lack of close commonality between the estimated 200-plus codes has made it confusing for companies to report their ESG performance data in a standardised manner.
Consequently, datasets have lacked comparability, making it difficult for investors to build portfolios that fit specific mandates and to create investment exclusion rules.
Data vendors, ratings agencies and larger asset managers have done their best to fill in the gaps, but the inconsistency of outcomes has been a regular target of criticism and focus of blame for greenwashing.
“A lot of money and resources have been put into complying but the tangible benefits to end users or actual positive real-world sustainability impact have been negligible,” Adrian Whelan, senior VP at Brown Brothers Harriman, told ESG Insight.
“The inability to confidently compare and contrast companies on their sustainability performance has been lacking and this is the single-biggest benefit that might be derived from widespread use of ISSB frameworks by global corporate issuers.”
The first standards are expected to be active from January, earlier than planned. The timetable for rolling them out was accelerated to meet growing demand investors concerned that long-term financial stability could suffer without a set of common international rules in place.
Expectations need to be managed for some time yet, however. There are no plans yet for the standards to be built on the principle of double materiality, which would require the disclosure of data on the impact companies have on climate and vice versa.
Also, the IFRS S1 will be focused only on the general requirements for disclosure of sustainability-related financial information and on and IFRS S2 on climate disclosures. Other so-called “greenprints” covering the reporting on biodiversity, for instance, and the social and governance pillars of ESG, are due later.
“The ISSB chair announced that it will be building a connection between the climate standards and issues around natural ecosystems, deforestation, water, biodiversity and the just transition, drawing on the Task Force for Nature-Related Financial Disclosures (TNFD), that is expected publish its final recommendations in September this year,” noted Balfousia.
End of Greenwashing?
There is another important benefit that would come from a standardised and trusted data space: greenwashing. Inconsistencies in ESG ratings as well as low levels of trust has led to criticism from conservative politicians.
“With uniformity of approach, the ongoing cries of “greenwashing” might reduce somewhat,” said Whelan. “I believe overall greenwashing claims are overstated and are as attributable to poor data availability and incomplete and myriad perplexing regulatory rollouts as purposeful misinformation from issuers.
“The ISSB could help iron out some of these creases in disclosure standards.”
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