Building a sustainable global economy must be a collaborative effort. Citizens, governments, regulators and the private sector all have to make a contribution. I can say with confidence that business is ready to play its part. In the past year major corporations have strengthened their commitment to the undertaking and have made tangible progress towards turning their promises into action.
At COP 26, the United Nations climate change conference held last November in Scotland, a new organization - the International Sustainability Standards Board (ISSB) - was created, and charged with the task of developing common reporting standards on sustainability. The goal is to have a unified set of rules as rigorous as those that govern financial reporting.
The significance of this development may not have been fully appreciated at the time. Reporting is not a subject that attracts a great deal of attention. In this case, it should. Creating these reporting standards will be critical to moving forward, especially on climate change. Companies and their investors need to understand the risks they face—both the physical risks from floods and storms—and the transition risks that will come with a shift to a net-zero carbon world. They need to be able to measure those risks, and investors need to be able to see how firms stack up against one another, both within industries and across industries.
With this information in hand, companies can develop strategies that mitigate risks and capitalize on opportunities. That last point is often lost in the conversation on climate change, but it is vital. Savvy firms will realize that new lines of business can be created that simultaneously build shareholder wealth and contribute to a greener world. Whole new industries may emerge as the private sector brings its money and talent to bear on the energy transition.
But none of that will be possible without the common language the new standards will introduce. To see why one need only look at the experience of the recent past. Companies have voluntarily been disclosing more, but the information has not always been useful. Firms have been able to pick and choose from a number of disclosure standards and they have been able to interpret them in a variety of ways. The result has been a jumble that satisfies no one. The 2021 Corporate Reporting Survey (pdf) and EY Global Institutional Investor Survey (pdf) show that companies and investors alike are frustrated by the current situation. The same surveys make it clear that both groups favor ESG standards that are consistent and mandatory again, much like the framework that covers financial reporting.
Adoption of those next-generation standards may not be far off. In March, the ISSB published two proposals for disclosure requirements, one for general sustainability, the other for climate change. Constituents will have several months to provide feedback. The ISSB plans to review the feedback and issue final rules by the end of the year.
The quick progress is both welcome and badly needed. In a report released in February, a climate change panel convened by the U.N. warned that half the world’s population is already vulnerable to increasingly dangerous climate impacts. Without swift action to limit global warming, the panel said, the world can expect more deadly storms, more intense heat waves, rising seas and additional strains on crops.
The energy transition required to limit global warming is likely to take place over the course of decades and it is impossible to forecast what the pace will be. However, the war in Ukraine has temporarily focused attention on the supply and prices of fossil fuels. Whether this will act as an impediment or a spur to greener technologies is difficult to predict.