While it may lack some of the drama of the net zero and deforestation pledges that have come already at COP26, the Nov. 3 announcement by the International Financial Reporting Standards Foundation (IFRS) that it intends to consolidate the Value Reporting Foundation (VRF) and the Climate Disclosure Standards Board (CDSB) may well prove to be one of the most important developments in Glasgow.
For purposes of transparency: I serve on the Board of the Value Reporting Foundation, and prior to that, on the Board of the International Integrated Reporting Council. The steadfast focus from these organizations to prioritizing outcomes over institutional interests has been fantastic to see: Their leaders deserve immense credit for that vision.
Since ESG reporting and disclosure began more than 20 years ago with the launch of the Global Reporting Initiative (GRI), all participants in the reporting “system” have quite justifiably decried the confusion, duplication and inconsistencies in reporting standards and frameworks.
All participants in the reporting ‘system’ have quite justifiably decried the confusion, duplication and inconsistencies in reporting standards and frameworks.
Some of this duplication is to be expected. We have been witnesses to and participants in the creation of a new form of measuring value and providing transparency. The significance of this is massive, important and complicated.
Times have changed. Fragmentation serves no one’s interests. As ESG gains momentum and urgency, the era of “letting a thousand flowers bloom” is no longer fit for purpose. It is time to embed sustainability considerations in the basic functioning of the capital markets. That will only happen with universal disclosures that enable consistency.
The work of the nascent International Sustainability Standards Board (ISSB), which will be significantly strengthened by the consolidation announced earlier this month, will advance with the objective of achieving comparable, consistent and reliable disclosures on climate and other sustainability issues.
Much remains to be done and demonstrated. It will be essential that a fast-evolving landscape be embraced in the new ISSB to ensure that reporting reflects society’s expectations. This is particularly true when it comes to the “S” in ESG, which is sometimes harder to quantify: Equity is not as easy to measure as carbon emissions. The new ISSB would be wise to take heed of the “double materiality” model that embraces not only things that are financially material today, but also those matters that are material to society, and which often become financially material tomorrow. Other key actors — including the GRI, the Task Force on Climate-Related Financial Disclosures (TCFD) and the World Economic Forum’s International Business Council — can and should be part of the shaping and implementation of the ISSB.
As ESG gains momentum and urgency, the era of ‘letting a thousand flowers bloom’ is no longer fit for purpose.
The news from Glasgow may well mark a real turning point in how markets operate. A harmonized, universal system will align incentives, promote wider uptake and enable comparability. Consolidation should also do three other critical things:
- Unleash more business focus on creating long-term value for all stakeholders.
- Allocate capital by investors to companies who embrace a long-term approach.
- Enable the public, and policymakers, to understand which companies are truly delivering in pursuit of a just and sustainable world.
We all celebrate the new commitments coming from COP26. We also know that commitments alone won’t get the job done. The alignment announced last week may well provide the foundation on which ambition can be turned into action.