Sustainability Disclosure Marks Progress at COP26

posted by Marsha Vande Berg on November 17, 2021 - 9:37am

(Marsha J. Vande Berg is CEO of MJVGlobal Insights, serving as an educational resource to corporate and investment executives about sustainability, governance and political economies. As CEO of Pacific Pension and Investment Institute, she worked closely with global pension executives, particularly in the Asia Pacific. A Stanford Distinguished Careers Fellow, she teaches, writes for international publications and is a frequent forum and webinar speaker. Reach her on LinkedIn or Twitter.)

SAN FRANCISCO (Callaway Climate Insights) — COP26 critics, step to the side. From the get-go, few of us expected that the two-week UN Climate Summit in Glasgow, which ends Friday, would deliver the ultimate solution to climate change tied up in a big red bow and marked for extinction no later than 2050. There are too many variables, timetables, individual government and private sector interests at stake. But that doesn’t mean we are not on our way. We are. 

Can we get there soon enough? We hope so, but it depends. 

Former President Barack Obama: “The cold hard fact is, we will not have more ambitious climate plans coming out of governments unless governments feel some pressure from voters” — and especially young people.  In other words, it will take incremental progress, public pressure and all generations’ hands on deck.  

Also, Rachel Kyte, dean at Tufts University Fletcher School, climate adviser to the UN secretary general and recently featured as a CCI Sustainability Star:  We may not be there yet, “but things are starting to move in the right direction.” She was speaking as the meeting in Scotland neared its midpoint. 

Momentum counts. And there has been momentum, albeit halting in instances, ranging from pledges to halt methane gas emissions and deforestation to a private sector pledge to drive the climate infrastructure needle to net zero by deploying billions in assets — all over time.  

There was also the little-noticed announcement early on in the summit — a blockbuster as it turns out — from the International Financial Reporting Foundation (IFRS). IFRS oversees the board that sets and administers the accounting standards public companies in 140 countries worldwide (excluding the U.S.) comply with when making their legally obligatory financial statements. 

It turns out the foundation is creating a brand new board — the International Sustainability Standards Board (ISSB), which will write and administer global corporate sustainability disclosure standards. Blockbuster? Really? 

Yes. It turns out that companies headquartered in jurisdictions around the world that elect to follow the IFRS sustainability disclosure standards will use the standards when deciding the material factors they should disclose publicly about the ESG risks they are facing now and into the future. The standards also will serve as guides when describing those strategies needed to enhance competitiveness together with ESG-related enterprise value. 

Disclosures are likely to be both quantitative and qualitative or descriptive. Just like companies today which use the voluntary SASB standards as their guideline to disclosure, the content of the disclosure must be material, namely so central to the company’s operations that its very omission from disclosure would raise questions from investors and other stakeholders. 

Disclosure should also be decision-useful to the very investors who are the lead stakeholders driving the demand for deeper insight into a company’s ability to deal with externalities, like climate change and pandemic-accelerated inequality. 

This push by investors for sustainability standards has been a long time coming. The emphasis is on securing access to information that is current, comparable and credible about an enterprise’s sustainability into the future. It’s likewise beneficial to corporate C-suites who get guidelines to measure and thus more successfully manage exposure to risk from externalities. 

There have been two voluntary disclosure standard setters up to now — the CDSB, a subset of the CDB (formerly Carbon Disclosure Project) and also the earliest pioneer in the field — and SASB (the Sustainability Accounting Standards Board, now the True Value Foundation or TVF. At last count, SASB industry-focused standards were de rigueur for more than half of S&P 1200 companies and over 1000 companies worldwide using the SASB framework.    

Now both SASB/TVF and CDSB will consolidate with IFRS, meaning they will be foundational to the international sustainability standard setting process. The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) will lend aspects of their disclosure guidelines to the process. 

As the enterprise management guru Michael Porter famously said, you can’t manage what you can’t measure. With the ISSB standards, the intention is to facilitate current, comparable and credible corporate transparency that investors can use when making decisions about how the C-suite creates and extends long-term enterprise value. Above all, the benefit accrues to capital market transparency and price-setting efficiencies. 

Still, it will be up to individual governments — starting with the 140 that already subscribe to the IFRS financial disclosure rules — to adopt the ISSB standards.

Also the ISSB is not the only game in town. In the U.S., where corporate financial disclosure follows GAAP accounting rules, the chair of the SEC has signaled the regulator’s intention to look hard at formulating climate change disclosure requirements. In Europe, the European Corporate Sustainability Reporting Directive (CSRD), run by the European Financial Reporting Advisory Group (EFRAG), is now in the process of building out standards that will be adopted by European Union companies by October 2022. The EU regime will require audited ESG information from nearly 50,000 companies and also support the existing Sustainable Finance Disclosure Regulation (SFDR) and the EU Green Taxonomy. 

Clearly, sustainability corporate disclosure is just one of the many critical steps that will bring governments and the global economy closer to succeeding at giving chase to climate risk. Transitioning to a single set of international sustainability standards will require patience and time. But for now, the momentum is set.