Three Dynamics to Watch for in '22 as Sustainable Standards Unite

(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) — Maybe the very idea strikes you as arcane — sitting at a table and debating endless hours to decide the size, shape and scope of global corporate sustainability standards — which then may take years before capital markets put them on par with accounting rules. 

But take a moment to consider that just maybe a whole bevy of committed experts from San Francisco to London, Tokyo and Singapore is doing something more than promulgating new regulations. Rather, they are creating critical stopgap measures against what’s destroying our planet earth. And that is hardly arcane. 

The Value Reporting Foundation (TVF), formerly the Sustainability Accounting Standards Board (SASB), raised the flag for sustainability standardization during their Dec. 6 and 7 virtual annual symposium. They did so on behalf of themselves and their fellow standard setters who are now in the midst of drafting global baselines for standards against which public companies can reliably disclose the impact of climate risk on the value of their enterprises. 

In turn, these standards will guide the data selection for measuring the material or consequential impact of externalities like climate risk — and internal operational shortfalls like compromised governance and/or insufficient C-suite sustainability acumen. In the short term, the standards still must be adopted by regulatory jurisdictions and even then, compliance is likely to be voluntary, at least in the short term.  

An increasing number of investors with collective assets in the trillions of dollars are on the march and in the vanguard of those who are driving this charge in the markets. Clearly, they and their beneficiaries stand to benefit the most from credible disclosure as to how, where and why the companies they invest in will short-circuit climate risk’s impact to their bottom line as well as apply innovation as a win for enterprise value.

They’re part of a “big shift” in how investors are engaging with C-suite teams on topics related to sustainability. “The dialogue has changed dramatically,” CalSTRS CIO Christopher Ailman told the TVF symposium. “For the first time, companies are really paying attention to shareholders…We are also a more vocal shareholder base, and the impact of that is profound with companies.” 

Janine Guillot, president and CEO of TVF, offered a similar perspective. Investors, corporate executives and standard setters like TVF no longer have to talk about why we should have sustainability disclosure. The conversation is now about how we are going to do it, she said.

It’s revolutionary — especially in light of standard drafting’s typically glacial pace. 

Indeed. There are at a minimum, three sets of truly significant dynamics that warrant keeping an eye on, starting with the London-headquartered IFRS Foundation, the umbrella organization for the IASB which oversees the principles-based, IFRS financial accounting standards, now used in some 140 countries. 

It was at the recent COP26 summit in Glasgow that the IFRS announced boldly to the world that it now has set up the International Sustainability Standards Board (ISSB) to promulgate sustainability standards as global baseline measures. Since then, it also named Emmanuel Faber, former board chair and CEO of Danone and champion of sustainability disclosure for the benefit of capital markets and investment decision-making, as chairman. They also have published two disclosure prototypes, one for disclosing climate factors and another which follows a general disclosure protocol. 

The announcement was pivotal both in terms of process and establishing momentum. It references the merger of the IFRS Foundation with TVF — which only a few short months ago absorbed the IIRC — and the CDSB, an early European disclosure pioneer. The TCFD’s framework for climate disclosure will inform the new standards content — a framework now used the world over by hundreds of companies to identify and explain their climate risk. 

One of the two other sets of dynamics is the Europeans’ pole position in sustainability standard setting under the umbrella of Europe’s Green Deal to be carbon-neutral by 2040. The other dynamic is what’s happening within the U.S. SEC, which has not yet done much beyond consulting stakeholders about what should be the scope and shape of guidance to listed companies on U.S. exchanges. 

Still, markets could see the SEC take definitive steps early in the New Year but not without trepidation. The commission already operates under a heavily regulated environment that is particularly sensitive to regulatory capture and that has been aggravated by a politically polarized Congress and electorate. 

Separately and together, these dynamics could challenge the ISSB’s ambition to be the source of a common language of sustainability disclosure and a globally harmonized sustainability regulatory regime. So far, the IFRS and the ISSB have not been stymied.  Rather they envision the appeal of their baseline standards to be universal with capacity to support “building blocks” that reflect individual jurisdiction characteristics.

It’s an ingenious approach that allows ISSB to be both global and specific to one regulator versus another, including the SEC and the EU. 

Hope undaunted by ambition and blind to the pitfalls? Maybe but then maybe not. Bob Eccles, founding chair of SASB, a founder of IIRC and professor of management practice at Oxford, interviewed together with Jean Rogers, founder of SASB and as of this month, global head of ESG at Blackstone (BX), for GreenBiz, offers:

“In the U.S., it’s going to come down to rationality versus ideology. I think rationality will win because that’s how investors and companies make decisions. Politicians can make it easier or harder but in the end they must bend to the will of the people, and it is the people’s interests that investors ultimately represent.”

Rogers — profiled in Callaway Climate Insights’ Sustainability Stars last year — suggested, “The opportunity for ISSB is not to achieve global standardization but to align the global market around an approach to sustainability standards setting and core principles, while allowing for jurisdictional differences in implementation.” 

Critical in the days, months and perhaps even years ahead will be the ISSB’s ability to telegraph to key stakeholders its core mission, namely its intention to inclusively promulgate baseline standards taking into account all key stakeholders, and then to secure buy-in on the part of companies, both public and private, in developed economies as well as emerging economies and by regulators in individual jurisdictions, starting with the 140 countries that now subscribe to IFRS financial disclosure rules. 

But the ultimate achievement will be adoption of the ISSB’s approach as universal best practice if sustainability disclosure falls short of becoming mandatory.  Speaking at the TVF Symposium, representatives of regulators in Singapore, Japan and the United Kingdom suggested that there is every likelihood that their respective jurisdictions will embrace the ISSB approach because of widespread adoption of the TCFD framework — a cornerstone of the ISSB approach. 

Satoshi Ikeda, chief sustainable finance officer, Financial Services Agency (FSA), Japan, said: “ISSB as a standard setter will be a very significant game-changer. With TCFD part of the ISSB standard, companies listed on the Tokyo Stock Exchange could be permitted to disclose per ISSB standards. In fact, adoption of ISSB by the business community could skyrocket.”

Abigail Ng, executive director, Monetary Authority of Singapore (MAS), said that like Japan, Singapore promotes climate change disclosure using the TCFD framework. “This paves the way for the future implementation of ISSB.” Still, the process may take a few more years, she added. 

Sacha Sadan, director of ESG for the UK Financial Conduct Authority, said, “We’re not even there yet, and we already are committed.” 

And again, TVF CEO Guillot: “This is a structured approach for holistic business planning and strategy.”