Setting global sustainability standards
The IBC metrics are an impressive achievement, but they are only the start. Now is the time to consolidate, bringing together the knowledge and experience gained over the years to develop a global set of sustainability standards.
Leading the way on this journey is the International Financial Reporting Standards (IFRS) Foundation (the Foundation), with its trustees issuing a consultation paper on sustainability reporting on 30 September 2020. This asked stakeholders whether the Foundation should play a role in setting global sustainability standards and, in addition to its current role as a financial reporting standard setter, whether its standard-setting activities should expand into this area.
A sustainability standards board (SSB) has been proposed by the trustees that would be governed by the Foundation provided that certain conditions are met. These requirements include support from and interaction with stakeholders, governance structure, recruitment, resources and funding, and synergies with financial reporting.
The Foundation is well placed to form and oversee a sustainability reporting standard-setter in a manner that would meet those requirements for success as well as other key criteria. As such, the EY organization supports the trustees’ recommendation to be involved in this process through the development of an SSB that will promulgate global sustainability reporting standards and facilitate a greater nexus between financial and nonfinancial information. This will help companies report on their long-term value to investors and other stakeholders, including society at large.
One key observation is that the Foundation has so far focused on financial reporting, making it paramount that the governance structure has a balanced composition of oversight boards and the appropriate technical know-how in sustainability reporting. Therefore, for the sustainability project, the Foundation will need the staff and members of the governance bodies involved to have strong technical skills and experience in the various aspects of sustainability reporting.
Capital markets vs multi-stakeholder approach
Currently, the mission of the Foundation is to deliver robust, reliable and transparent information as input for the decisions of the primary users of general-purpose financial statements. Given this background, some stakeholders have suggested that the proposed SSB should focus on producing information about the effects of relevant events on the company, as this would support the decisions of the same primary users (the capital markets approach).
However, other stakeholders have gone further to suggest developing sustainability standards that would also require a company to disclose its impact on the wider environment. The disclosures are typically about issues that are material to multiple stakeholders’ understanding of a company’s effect on its environment (the multi-stakeholder approach).
There is a natural inclination to focus on the sustainability information that is most relevant to investors and other market participants, hence, the capital markets approach. But the acceptance and commitment of a set of global standards require input from a broad range of constituents. The responsibility for sustainability is broad and the capital markets approach cannot provide the entire picture on sustainability.
The distinction between the capital markets approach and the multi-stakeholder approach will blur over time as the links between externalities and direct or indirect effects on the future cash flows of the company become clearer. And, as societal and financial values further converge, investors will realize that while the effect of the company on the environment may not have direct cash-flow consequences today, it may lead to regulations, actions and behaviors that will affect the company’s long-term value and viability.
Therefore, making a distinction between what is relevant to investors and what is relevant only to other decision makers will become increasingly difficult. If the capital markets approach is adopted, the issue should be reconsidered once the standard-setter has gained some experience in setting sustainability standards.