The trustees of the IFRS Foundation have published a consultation paper to assess demand for global sustainability standards.
By Paul A. Davies and Michael D. Green
On 30 September 2020, the International Financial Reporting Standards Foundation (the Foundation), a not-for-profit organisation that develops global accounting standards, launched a consultation paper seeking to assess demand for global ESG standards. The paper seeks to assess whether the Foundation should expand its current remit of developing financial reporting standards and use its experience in international standard-setting.
The need for change
Sustainability reporting is increasingly important for corporate stakeholders, either as a means of value creation or as a mechanism by which companies mitigate costly legal and regulatory risks. Notwithstanding differences in scope and motivations, actors generally agree on the need to harmonise reporting frameworks. As the paper notes, a set of comparable and reliable standards will allow businesses to “build public trust through greater transparency of their sustainability initiatives”, in effect conferring assurance. For investors, verifiable and clear information will allow for sustainable standards to be used as more predictable indicators of a company’s potential. Comprehensive reporting standards would also allow for a better defined and uniformly applied threshold of “materiality”. As the matters currently stand, “differences in focus and audience lead to differences in the way [the] organisations approach materiality, with some organisations focusing on the impact of risks on a company and other organisations focusing on a company’s impact on the environment”, the paper notes.
The same concerns have been voiced by numerous other organisations, who have themselves emphasised the need for harmonisation:
- In August 2020, the CFA launched a consultation on ESG disclosure standards for investment products, seeking to enhance transparency and comparability between ESG products.
- In September 2020, leading sustainability and integrated reporting organisations, including the Global Reporting Initiative and the Sustainability Accounting Board, pledged to provide joint market guidance, in an effort to achieve comprehensive harmonisation.
- In September 2020, the World Economic Forum’s International Business Council released a white paper on converging ESG reporting standards.
In October 2019, Foundation trustees set up a Task Force to “identify the demand from stakeholders in the area of sustainability reporting and understand what the Foundation could do in response to that demand”. As presented in the paper, the best solution identified by the Task Force would be establishing a Sustainability Standards Board (SSB), a new standard-setter that would work with existing initiatives. The objective of the SSB would be to develop and maintain a global set of sustainability-reporting.
The paper proposes that the SSB have a three-tier governance structure similar to that of the Foundation itself: an independent standard-setting board of experts governed and overseen by a global set of trustees who, in turn, are accountable to a monitoring board of public authorities.
In establishing the SSB, the paper prioritises certain requirements that are considered to lead to the board’s success, such as achieving a sufficient level of global support, working with regional initiatives, achieving appropriate technical expertise and achieving the separate level of funding required.
The paper also seeks views as to whether the SSB should initially focus climate-related financial disclosures or potentially broaden its remit into other areas of sustainability reporting. A similar question is posed in relation to materiality: should the SSB take a gradualist approach to materiality and only subsequently provide a more comprehensive assessment of risks and opportunities?
The Foundation is accepting responses to the above proposals until 31 December 2020. Latham & Watkins will continue to monitor developments in this area.
This post was written with the assistance of Sabina Aionesei in the London office of Latham & Watkins.
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