While this movement demonstrates the stakeholder demand for more information on ESG risks, it also raises the risk of fragmentation and the need for greater comparability and consistency.
2. The distinction between the enterprise- and societal-value approaches will blur over time
The ISSB has announced it will develop sustainability disclosure standards that address companies’ impacts on sustainability matters relevant to assessing enterprise value (as determined by market participants) and making investment decisions. This approach is closely aligned with the IFRS Foundation Constitution and is aligned with the “traditional” understanding of materiality.
The concept of materiality has been at the heart of varying approaches to ESG reporting – while many jurisdictions have taken an enterprise-value approach, others – most notably the European Union – have taken a broader, societal-value approach (i.e., including the impact companies have on people and the environment). What is often lost in the debate over materiality, however, is that the distinction between the enterprise-value approach and the societal-value approach is dynamic, having evolved in the past and will inevitably evolve over time, blurring as the links between externalities and direct or indirect effects on the future cash flows become clearer.
Investors recognize that as societal and financial values converge – amid broader shifts around the role of business in society – the effect of an entity on its environment (and vice versa) may not have direct cash flow consequences today, but may have material consequences that affect the entity’s long-term value and viability. Making a distinction between what is relevant only to investors and what is relevant only to other decision makers is going to be increasingly difficult.
Companies should monitor ongoing developments – at both the ISSB- and jurisdictional-levels – as the standards start to take shape.
3. The importance of balancing a global baseline with the need for localization
G20 Leaders, in their declaration following their recent Summit in Rome, welcomed the work of the IFRS Foundation to develop a global baseline of sustainability disclosure standards. At the same time, many G20 nations have moved to enact sustainability disclosure mandates – some which will align to the ISSB process and others which are jurisdiction-specific.
In the EU, for example, a jurisdiction that has expressed a commitment to build on and contribute to global efforts in the field of sustainability reporting standards including the work of the IFRS Foundation, policymakers view disclosure as a mechanism for behavioral change. The CSRD is a key element of the European Green Deal, the European Commission’s set of policy initiatives designed to make Europe climate-neutral by 2050.
Like the IFRS Foundation, we recognize the need to instill regional flexibility alongside a global standard. In the months and years ahead, it will be important to achieve an appropriate level of balance, ensuring that inefficiencies and inconsistencies are minimized.
The launch of the ISSB is the most promising development in the move toward harmonization of ESG reporting standards. Through common and consistent measurement, we will have the opportunity to benchmark progress, improve decision-making and accountability and increase trust. The coming months are an opportunity for multiple stakeholder groups to come together with collaboration and urgency, while generating the broad buy-in required for meaningful advancement.
With additional contributions from Janice Freeman (Policy Analyst, EY Global Public Policy) and Julie Croglio (Secondee – ESG Initiatives, EY Office of the Global Chairman and CEO).