Recent developments in sustainability reporting, or: bring on the psychic returns!

Here’s some recent news:

  • The IFRS Foundation and Global Reporting Initiative (GRI) have announced today a collaboration agreement under which their respective standard-setting boards, the International Sustainability Standards Board (ISSB) and the Global Sustainability Standards Board (GSSB), will seek to coordinate their work programmes and standard-setting activities.
  • The IFRS Foundation, which announced at COP26 the establishment of the ISSB to develop a comprehensive global baseline of investor-focused sustainability disclosures for the capital markets, and GRI, the leading global standard-setter for multi-stakeholder focused sustainability reporting, further announced that they will join each other’s consultative bodies related to sustainability reporting activities.
  • The agreement reflects the importance of ensuring compatibility and interconnectedness of investor-focused baseline sustainability information that meets the needs of the capital markets, with information intended to serve the needs of a broader range of stakeholders. The IFRS Foundation and GRI recognize the considerable public interest in aligning where possible their respective work programmes, terminology and guidance, helping to reduce the reporting burden for companies and to further harmonize the sustainability reporting landscape at an international level.
  • By working together, the IFRS Foundation and GRI provide two ‘pillars’ of international sustainability reporting—a first pillar representing investor-focused capital market standards of IFRS Sustainability Disclosure Standards developed by the ISSB, and a second pillar of GRI sustainability reporting requirements set by the GSSB, compatible with the first, designed to meet multi-stakeholder needs.

And in the same week as that, there was more:

  • The Securities and Exchange Commission today proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks.
  • “I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers,” said SEC Chair Gary Gensler…”Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions….”

The Canadian securities regulators also proposed rule changes along those lines late last year, so things are moving forward on just about every available front. Perhaps inevitably given the complexity of the issues, they’re not moving forward in complete parallel – for example the Canadian proposal wouldn’t extend to requiring any such metrics within the financial statements, as the SEC proposal currently does. And then there’s the pervasive, unanswerable question: even if these initiatives all proceed as fully and efficiently as possible, what will they yield? In a lengthy and heartfelt dissent to the SEC proposals, Republican commissioner Hester Peirce commented as follows:

  • Executives…might not mind the new regime that elevates squishy climate metrics.  After all, how wonderful it will be for an executive who has failed to produce solid financial returns to be able to counter critics with a glowing report on climate transition—“Dear Shareholders, we fell far short of our earnings target this year, but you will be pleased to know that all in all it was a fantastic year since we made great progress on our climate transition plan.”  If the CEO’s compensation is tied to lower greenhouse gas emissions, she can forgo the focus on company financial value—so 20th century!—and spend her time following the proposal’s urging to convince suppliers to shift to electric transport fleets and customers to freeze their jeans instead of washing them.
  • Who then might mind?  Investors.  And by investors, I mean real people who are saving for retirement and need to earn real financial—not psychic—returns on their money… 

Peirce believes that “markets, if we let them work, are remarkably deft at solving problems of all sorts, even big problems like climate change, but they do so in incremental and surprising ways that are driven by a combination of chance, opportunity, necessity, and human ingenuity.” Unfortunately, to extract any individual passage from Peirce’s dissent does something of an injustice to the whole. But one might better argue that for every problem that markets have deftly solved, they’ve created another one, or maybe two (it’s a rare company that doesn’t ultimately contribute either to environmental pillaging or to increasing inequality and accompanying social tension). Although Peirce mocks the idea that current performance might appropriately be partially sacrificed for the sake of longer-term aims, this is exactly the consensus that has to be reached. And certainly, there’s no way forward that doesn’t cause real financial pain for real people. If they have any empathy for future generations though, they may feel some offsetting psychic benefit at least…

The opinions expressed are solely those of the author

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