Sustainability standards – if they affect anyone’s decisions, we don’t want them!

Here’s an extract from a comment letter submitted by US SEC Commissioner Hester M. Peirce to the IFRS Foundation, on its initiative to create a sustainability standards board

  • Financial statements, prepared according to high-quality accounting standards, enable investors to make informed economic decisions. As the Foundation’s website explains, “IFRS Standards contribute to economic efficiency by helping investors to identify opportunities and risks across the world, thus improving capital allocation.” Although investors are not uniform, by definition, an investor is “a person or group of people that puts its money into a business or other organization in order to make a profit.” Financial reporting is designed to help investors understand whether they will make a profit from their investment of money in a particular issuer.
  • By contrast, not only is the term “sustainability” imprecise, but the objective of sustainability standard-setting and sustainability reporting is not universally agreed upon and is not consistent over time…. Sustainability standards are intentionally laden with judgments about where capital should flow, a concept foreign to financial reporting standards. Hence, they must not be intermingled. Former SEC Chief Accountant Wes Bricker explained the difference between general purpose financial reporting standards and special purpose standards:
    • When formulating standards for general purpose financial reporting, the IASB and the FASB do not seek to influence the outcome of investor capital allocation decisions or actions taken by management; instead, the boards’ design standards that provide better information to inform those decisions and actions. The alternative, whereby standards are designed to privilege specific objectives, economic activities, financial products, or market participants, could diminish confidence in the accuracy or quality of reported information, which could thereby impair capital formation, and in turn, negatively impact economic activity.
  • These concerns appear relevant to sustainability standards, which are designed for the particular objective of influencing capital flows.
  • Sustainability standards are unlikely to foster the same degree of accuracy, comparability, objectivity, and reliability across the reporting of a wide range of issuers that financial reporting standards do. Although sustainability standards at times may touch on economics, they are not fundamentally about economic decision-making.
  • … sustainability standard-setting will shift the flow of capital in ways that inadvertently may undermine sustainability goals. Advocates of the Foundation’s plan embrace the power of sustainability standards to direct capital flows to meet net zero emissions goals, but what if the sustainability standards turn out to be flawed? Deciding how and from where transformative technologies and socially beneficial innovations will emerge relies on the collective wisdom and on-the-ground experience of the billions of people who contribute to and draw from the global economy. By contrast, centrally determined, universally applicable, inflexible standards can impede the global economy’s ability to effectively address climate change and the other critical issues on which the ISSB will likely focus.

That would be the collective wisdom of the billions of people who’ve unwittingly driven the environment into the ground in the first place (while contributing to rampant inequality and all the rest of it), only a handful of whom hold any real decision-making power? It’s not hard to guess that Commissioner Peirce was appointed by Donald Trump, and thus can’t expect to avoid suspicion (perhaps by unfair association with dismal Trumpian appointees in other areas, but hard to dispel when there were so many of them) of having been charged more with clogging things up than facilitating them. Certainly the blunt summary of financial reporting as being about no more than “help(ing) investors understand whether they will make a profit” sounds somewhat Trumpian. Further, Commissioner Peirce had made similar points in an earlier statement (“Common disclosure (ESG) metrics… will drive and homogenize capital allocation decisions. A single set of metrics will constrain decision making and impede creative thinking. .. The result of global reliance on a centrally determined set of metrics could undermine the very people-centered objectives of the ESG movement by displacing the insights of the people making and consuming products and services) and also joined with another Trump-appointed Commissioner in trying to put the brakes on SEC staff’s “enhanced focus” on climate-related matters.

I’ve expressed several times my own view that over-selling the likely impact of these initiatives does no one any favours; they’re particularly counter-productive if they assist (as I believe they do) in perpetuating an illusion that our problems can be largely addressed through market forces, thus alleviating the need for more painful government intervention and personal sacrifice. But to argue that the initiatives are unwelcome because they’re likely to impede the market-driven solutions that would otherwise arise to save us all from ourselves is an exercise in pure perverse complacency. If it’s true that sustainability standards might “negatively impact economic activity,” it’s because we’re otherwise ultimately going to pay for much of that economic activity with our lives and societal well-being. However eloquently and no doubt honestly expressed, such sentiments can barely be separated from Trumpian retrogression at its most pure and destructive…

The opinions expressed are solely those of the author.

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