The march toward establishing reliable and comparable standards for sustainability reporting took a huge step forward Wednesday with the IFRS Foundation's highly anticipated announcement that it is creating a new International Sustainability Standards Board (ISSB).
At the COP26 global climate summit in Glasgow, Scotland, IFRS Foundation Trustees Chair Erkki Liikanen announced three new developments with regard to sustainability:
- The formation of the ISSB, which is designed to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors' information needs.
- A commitment by organisations that focus on sustainability disclosures to consolidate into the new board. The IFRS Foundation by June 2022 will complete consolidation of the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF), which was formed earlier this year in a merger of the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB).
- The publication of prototype climate and general disclosure requirements developed by the Technical Readiness Working Group formed by the IFRS Foundation Trustees to undertake preparatory work for the ISSB. The prototype requirements are the result of six months of joint work by the CDSB, International Accounting Standards Board (IASB), the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD), the VRF, and the World Economic Forum, supported by the International Organization of Securities Commissions (IOSCO) and its technical expert group of securities regulators. Key aspects of these organisations' content has been consolidated into an enhanced, unified set of recommendations for the ISSB to consider.
The consolidation is an effort to address one of the biggest hurdles for disclosure as investors increasingly seek sustainability information amid worldwide concern about climate change. The proliferation of a variety of frameworks and standards has led to a lack of consistency in sustainability reporting that has frustrated companies as well as investors.
By creating the ISSB to act as one global standard-setter working with the IASB, the IFRS Foundation has developed a model for uniform disclosures. The Association of International Certified Professional Accountants is welcoming this announcement as a means for developing consistent, reliable, and comprehensive global sustainability standards to create purposeful, resilient organisations and a more sustainable future.
"Today's announcement marks a new, historical milestone in our journey to establish globally consistent sustainability reporting standards, signalling a new era in corporate reporting where the same level of rigour will be demanded for sustainability reporting as for financial information," Barry Melancon, CPA, CGMA, president and CEO of the Association of International Certified Professional Accountants, representing AICPA & CIMA, said in a news release. "Organisations do not operate in a vacuum; they must take a holistic approach to understanding how they create and deliver value to achieve sustainable success."
The Association believes this move will enable a necessary evolution for corporate reporting standards and ensure that corporate reporting remains fit for purpose in the post-pandemic world. Through his position as chair of the Value Reporting Foundation Board Strategy Committee, and previously in leading the IIRC/SASB merger, Melancon played an integral role in these efforts.
He said customers, employees, society, governments, and investors are demanding more organisational transparency beyond traditional financial metrics. But he said organisations can't manage what they don't measure, and they can't build trust without consistent, comparable information on a variety of metrics, including sustainability metrics. He said that's why a universally accepted set of sustainability standards is so important.
"Similarly, it is critical to enhance the reliability and transparency of that information with meaningful reporting and ultimately related assurance by professional accountants," Melancon said. "They have an important role to play improving their organisation's integrated thinking and decision-making capabilities. Professional accountants have the necessary skills and expertise to help effect meaningful change in this area and can work with stakeholders to integrate responsible and sustainable practices into their business and operating models."
One of the two prototype documents, which were published Wednesday, focuses on climate-related disclosures that build on the TCFD's recommendations and includes industry-specific disclosures. The second sets out general sustainability disclosures.
The ISSB will hold public consultations to inform its work plan and to seek comment on proposals informed by the recommendations from the Technical Readiness Working Group. Following these consultations, the ISSB's work will follow the IFRS Foundation's due process, including public discussions by the ISSB of feedback received to the consultations and possible changes to the proposals before they are finalised as standards.
The preparatory work by the Technical Readiness Working Group gives the ISSB an opportunity to quickly launch the consultation and the standards.
"My expectation is that the second part of next year will be when we will have the first climate standard in the market, third quarter or fourth quarter," Liikanen said.
"There's much work ahead of us and many challenges on the way, however, we have now a path to global sustainability disclosure standards for the financial markets," he said. "We will move diligently but with pace, and we will do so by working with close cooperation with you, with all important actors in the area."
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is FM magazine's editorial director.