The climate and sustainability reporting movement originated out of civil society, gaining prominence among a small number of socially responsible, activist investors. In recent years, however, the dynamics of the movement have dramatically shifted, with institutional investors increasingly seeking consistent and comparable reporting that helps them better understand environmental, social and corporate governance (ESG) risks.
As illustrated in EY Global Public Policy’s recent report, The future of sustainability reporting standards (pdf), the expected launch of the International Financial Reporting Standards (IFRS) Foundation’s International Sustainability Standards Board (ISSB) in November, is the most significant and promising development in the move toward consistent, comparable ESG and sustainability reporting standards. While it is expected that the ISSB will promulgate a broad array of ESG standards, the urgency of the climate crisis has caused the Foundation to take a “climate-first” approach to standard-setting. The speed with which the policy environment is evolving has created an imperative for all companies to act in building the institutional capacity necessary to address forthcoming mandates.
The potential of the ISSB and the future of climate reporting and disclosure standards is expected to be a significant focus at COP26, the 2021 United Nations Climate Change Conference, in November. With less than 100 days until Glasgow, we recently hosted a conversation with some of the world’s leading voices on climate disclosure and reporting – Alain Deckers, Head of Unit, Corporate Reporting, Audit and Credit Rating agencies, Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA), European Commission; Curtis Ravenel, Task Force on Climate-related Financial Disclosures (TCFD) Secretariat member and Senior Advisor to Mark Carney, COP26 Finance Advisor and UN Special Envoy; and Dorothy Donohue, Deputy General Counsel of Securities Regulation, Investment Company Institute – to discuss the findings from our new report and the dynamics to watch in the months ahead. Through our discussion, three themes emerged:
1. Convergence vs alignment: A “building block” approach to standard-setting
“There is violent agreement around having a global baseline standard,” Mr. Ravenel said. “There’s no question about that. But the question is: who gets to set that standard? I would call it ‘coopetition’ between the SEC, Europe and the IFRS...but what everyone wants [is] the same thing. How you get there may be slightly different.”
He went on to say, the “devil is in the details.” For instance, is part of the disclosure framework mandatory and part voluntary? How much flexibility should exist to accommodate smaller private companies? Are Scope 3 (indirect) emissions included as mandatory, perhaps for certain sectors? Constructive dialogue is necessary, and Ravenel said he was optimistic, because most of the constituents have been working together for a long time and the “building block” approach to standard setting provides a flexible approach to balance alignment and flexibility.
There is growing support for a building block approach to ESG and sustainability reporting standard-setting (see below) whereby the ISSB produces a global baseline standard for all jurisdictions to adopt (achieving a level of global comparability). At the same time, select jurisdictions can build on the ISSB baseline by developing local standards and rules that respond to local stakeholder needs and expectations.