Sustainability reporting standards – meeting the needs of capital markets (did we leave anyone out?)

Momentum continues toward establishing a sustainability standards board…

One of the most recent bulletins came in the wake of a meeting of IFRS Foundation trustees in early March, including the following:

  • The Trustees welcomed the February 2021 public statement by the IOSCO Board, announcing IOSCO’s intention to work with the IFRS Foundation in developing a plan to establish a new board for setting sustainability reporting standards that meet the needs of the capital markets. This will include consideration of future endorsement of the new board and its standards. The Trustees recognize the importance for the public interest of reporting standards that address enterprise value, which captures expected value creation for investors in the short, medium and long term and is interdependent with value creation for society and the environment.
  • Based on the feedback to the 2020 Consultation, and encouraged by the IOSCO Board statement, the Trustees have reached the following views about the strategic direction of a new board:
    • Investor focus for enterprise value: the new board would focus on information that is material to the decisions of investors, lenders and other creditors.
    • Sustainability scope, prioritizing climate: due to the urgent need for better information about climate-related matters, the new board would initially focus its efforts on climate-related reporting, while also working towards meeting the information needs of investors on other ESG (environmental, social and governance) matters
    • Build on existing frameworks: the new board would build upon the well-established work of the Financial Stability Board’s Task Force on Climate related Financial Disclosures (TCFD), as well as work by the alliance of leading standard-setters in sustainability reporting focused on enterprise value. The Trustees will consider the prototype proposed by the alliance for an approach to climate-related disclosures as a potential basis for the new board to develop climate-related reporting standards. To prepare for this work, the IFRS Foundation will initiate a process of structured engagement with the relevant organizations.
    • Building blocks approach: by working with standard-setters from key jurisdictions, standards issued by the new board would provide a globally consistent and comparable sustainability reporting baseline, while also providing flexibility for coordination on reporting requirements that capture wider sustainability impacts.

From what I’ve seen, commentators generally endorse the initiative, even if at this point it’s hard to articulate that in more than general terms (CPA Canada for instance expressed support for the IFRS Foundation expanding its remit to sustainability standard-setting, while on just about every specific underlying point either expressing some concern, or else citing a lack of adequate information on which to form an opinion). One continuing exception, as cited here before, is Dr. Carol Adams, who in a recent website post criticizes the project’s lack of relative rigour, and repeats the view that the proposal is more likely to hinder sustainable development than to help it.

For my (much less informed) part, I become ever more concerned that the initiative may lend itself to virtue-signaling which while providing some means of differentiation between companies, is as likely to shield them in various ways as to spur them into worthier behaviour. The recent film The New Corporation provides some a handy summary of how, as its website sums it up, “the corporate takeover of society is being justified by the sly rebranding of corporations as socially conscious entities” – obviously, misleading environmental-related claims form a big part of this cynicism. A recent Guardian article by Simon Lewis, The climate crisis can’t be solved by carbon accounting tricks, provided further examples, such as this one:

  • Mark Carney, the ex-governor of the Bank of England and climate adviser to Boris Johnson, recently described his $600bn Brookfield Asset Management portfolio as “carbon neutral”, despite investing in fossil fuels. Carney said: “The reason we’re net zero is that we have this enormous renewables business.” He went on to claim that renewables avoid carbon emissions that would otherwise have happened, so they “offset” his investments in fossil fuel emissions. This is not net zero. It is an accounting trick. Emitting carbon at the same time as building solar capability does not equal zero emissions overall. Offsetting needs to be used to remove carbon dioxide from the atmosphere to counter difficult-to-remove emissions, and not just be an enabler of business-as-nearly-usual.

The enthusiasm for the IFRS Foundation’s initiative, and much of the positioning of advocates such as Carney, is based on the premise that we can “save the planet” while working within prevailing capitalist structures and expectations. But the main question for me remains this: better sustainability-related disclosure might indeed have some beneficial individual outcomes, such as allowing shrewd investors to get out of individual stocks before they crash, but what if crafting a truly sustainable future demands that they all crash, because the mechanisms that have propelled them at historical levels of returns will have to be discarded? Sure, the implications of such a question will never be within the IFRS Foundation’s remit, but shouldn’t they be within someone’s…?

Anyway, the trustees subsequently announced a working group to keep moving things along. Another major next step is to be a feedback statement on the consultation paper, with a final determination expected in November of this year…

The opinions expressed are solely those of the author

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