The Trustees of the IFRS Foundation have published a Consultation Paper “to assess demand for global sustainability standards and, if demand is strong, assess whether and to what extent the Foundation might contribute to the development of such standards.”
Here’s how the news release summed it up:
- Amid heightened focus on environmental, social and governance (ESG) matters, developments in sustainability reporting and increased calls for standardization of such reporting, the Trustees are now seeking stakeholder input on the need for global sustainability standards and gauging support for the Foundation to play a role in the development of such standards.
- The Consultation Paper sets out possible ways the Foundation might contribute to the development of global sustainability standards by broadening its current remit beyond the development of financial reporting standards and using its experience in international standard-setting, its well-established and supported standard-setting processes and its governance structure.
- One possible option outlined in the paper is for the Foundation to establish a new sustainability standards board. The new board could operate alongside the International Accounting Standards Board under the same three-tier governance structure, build on existing developments and collaborate with other bodies and initiatives in sustainability, focusing initially on climate-related matters.
- Erkki Liikanen, Chair of the IFRS Foundation Trustees, said:
- Calls for standardization and comparability of reporting on sustainability and climate-change issues continue to grow as these matters become increasingly important to capital markets. We therefore seek to assess whether there is demand for global sustainability standards and whether the IFRS Foundation should play a role in developing such standards.
- The Consultation Paper sets out critical success factors for the creation of a new board, including achieving sufficient support from public authorities and market participants; working with regional initiatives to achieve global consistency and reduce complexity in the reporting landscape; achieving the appropriate level of funding; and ensuring the current mission of the IFRS Foundation is not compromised.
I certainly support the general initiative – I wrote about the idea here in the context of a green paper by the Dutch entity Eumedion (which likely deserves some praise for pushing the IFRS Foundation along). At that time, even so, I expressed the view that “it’s not unlikely that the main benefit will be in allowing more consistent monitoring of (and profiteering from) a by-then irreversible collective decline,” and since then my thoughts along those lines have only darkened. This is how I put it a few weeks ago:
- To put it bluntly, as environmental conditions and long-term prospects steadily get worse, the task of picking investment winners and losers will become increasingly strained, increasing the need for a common reference point. But this doesn’t necessarily mean that (for instance) chronic polluters and all-round environmental criminals will be severely punished by the market, only that the risk-return opportunity they exist, relative to their then-current stock price, will be tricky to evaluate (for instance, in determining when to get out before the whole thing collapses). And this leads to the fundamental problem – that the goal of enabling more resilient, efficient financial markets, assuming an aspect of the desired resiliency is that they continue to make money for those who participate in them, is almost certainly inherently inconsistent with that of addressing climate change. Further, we’ve seen this year how covid-19 (which in its perverse way has made at least some contribution to the fight against climate change, by plucking planes out of the sky and so forth) has only allowed market returns to persist at the price of chronically increased inequality and debt burdens. It’s foreseeable that stock markets will continue to have less and less to do with general prosperity and well-being, and that the game of doing well in them will become largely abstract and disconnected, played by its own hermetic rules, their connection to the decaying real world largely illusionary. (The) main legacy (of projects in this area) may only be to fuel the continuation of that dynamic…
To its credit, the IFRS Foundation’s paper is free of “helping to save the world”-type rhetoric, vaguely acknowledging “differences in (stakeholder) scope and motivation” and the existence of a broader “context in which society is demanding initiatives to combat climate change,” but mostly proceeding on the empirical basis that the demand is there and that they might be in the best position to fill it. It also acknowledges the competing option of continuing the status quo (which it soberly observes would “carry the lowest risk of failure for the Foundation”) and of working to facilitate existing initiatives (which carries a “risk of causing fragmentation and adding to the complexity—by adding another voice to the discussion”). It also acknowledges some of the key framing issues that would immediately occupy a new board – setting the initial scope of its activities, the right approach to materiality, and others.
But the biggest challenge is surely the ticking clock. To quote my previous article again: “If such standards were in existence even by 2030, it would probably count as tremendously fast work. During that period, of course, an enormous amount of long-term value will continue to be destroyed, and the valid needs of society will continue to be trampled on. One much-noted source cites 2030 as the point where the Greenland ice sheet could already be doomed.” Nothing about the current paper suggests any greater urgency than that. But anyway, at least its first deadline, for comments to be received by December 31, 2020, isn’t too far off…
The opinions expressed are solely those of the author