Can The ISSB Provide Global Standards for Sustainability Reporting to All Stakeholders, Not Just to Investors? Will ESG and Sustainability Ever Become Synonymous?

By Alan Willis, FCPA, FCA
February 28, 2022

 A remarkable digital article was published in February 2022 by the Harvard Business Review.[1]

Co-authored by Professor Robert Eccles and responsible investing director, Bhakti Mirchandani, it was called “We Need Universal ESG Accounting Standards.” This echoes a plea by former Sustainalytics CEO, Michael Jantzi, two years ago at a conference in Toronto: “We need IFRS for ESG!”

The “Summary” to the article reads:

“ESG accounting is a mess. Competing initiatives mean there’s no uniform set of standards for measuring a company’s progress on sustainability. The good news is that a new initiative, the International Sustainability Standards Board (ISSB), promises to do for sustainability reporting what the International Accounting Standards Board (IASB) does for financial reporting — develop standards for companies to report their performance to investors.”

Sounds straightforward enough? Yes, at first, but a deeper dive reveals a question or two. Some such questions surfaced during a lively, heavily attended panel session at the GreenBiz conference in Arizona in February 2022, featuring three heavy-hitter veterans of the sustainability reporting landscape.[2]

First question: Are there any global standards for sustainability reporting? Answer: Yes. Founded in 1997, the Global Reporting Initiative has been the worldwide-accepted source of first Guidelines, now Standards, for companies to report to all stakeholders on sustainability performance, i.e., impacts on planet, people and economies. Over 92% of S&P 500 companies produce sustainability reports, out of which a majority base their reports on the GRI standards. The GRI Guidelines and Standards are not, however, designed for reporting that meets the special information needs of any one stakeholder group, such as institutional investors. A typical corporate sustainability report is lengthy and does not make it easy for, say, financial analysts to locate specific items of data that would be relevant and material to their research or recommendation decisions. 

The US-based Sustainability Accounting Standards Board was established in 2011 to remedy this situation. By 2018, it had developed sector-specific voluntary standards that companies could use for disclosures in 10K filings (e.g., MD&As) about sustainability topics that have financial performance implications for a given company and about related governance issues –  disclosures that would satisfy the SEC rules for materiality in reporting. In effect, this created a lens for focusing just on a subset of the full spectrum of sustainability issues addressed in a full multi-stakeholder GRI-style sustainability report. Since around 2007, the investor community has adopted the acronym ESG (environmental, social, governance) for this subset of E&S issues, referring to the environmental and social issues investors deem important enough to consider or factor into their analysis and portfolio decision making, plus governance policies and practices regarding such issues (general governance and quality of management have long been elements of investor consideration).

Two further initiatives – the International Integrated Reporting Framework (IIRC, 2013) and the Task Force on Climate Related Financial Disclosures Recommendations (TCFD, 2017) – had become available to guide companies in preparing reports and disclosures primarily for the benefit of investors (“providers of financial capital” in IIRC parlance). The former helps companies describe their use of and impacts on six “capitals” for enterprise value creation; the latter helps them in preparing investor-useful disclosures about the financial impacts of climate-related risks and opportunities and strategies to address them (company targets and plans for reaching net zero by 2050 now being a priority focus).

Enhancing Public Company Reporting

So, what is notable about the recently created International Sustainability Standards Board (ISSB)? The promise and expectation is simply that it will enhance public company reporting to shareholders (and other providers of financial capital such as lenders) by developing and issuing authoritative standards about “ESG” which, like the IFRS issued by the IASB, can be adopted and, as strongly encouraged by IOSCO, made mandatory in jurisdictions around the world. Very important too, however, is that the ISSB is consolidating within its organizational structure the resources and existing work of the Sustainability Accounting Standards Board and International Integrated Reporting Council (which had earlier merged to become the Value Reporting Foundation), and the TCFD (and also the less well-known Climate Disclosure Standards Board). In other words, ISSB is converging the efforts of four previously separate initiatives, and simplifying the alphabet soup of guidelines, framework and voluntary standards so confusing to companies and investors alike.

Therefore, arguably, starting in 2022, ESG accounting, i.e., reporting to investors alongside financial statements what they need to know to about enterprise value creation that factors in the E, S & G dimensions of it, will become less of a mess. The ISSB is committed first to issuing a global standard for climate-related financial disclosures, based on the existing TCFD Recommendations and a prototype standard already produced by an IFRS Foundation Working Group; an exposure draft for this first ISSB standard is expected later in 2022. The ISSB will then have to prioritize other E&S issues for which global standards are needed, and execute a multi-year work plan accordingly.

So, do we need universal ESG accounting standards? Yes. But will the ISSB provide global standards for sustainability reporting to all stakeholders about an organization’s impacts on the environment, society and economies, or its contributions to the UN SDGs? Doubtful. 

Companies, their CFOs, CEOs and audit committees will be delighted that the challenges they have hitherto faced in reporting to investors about enterprise value creation, while still formidable, will soon be made less so by bringing such reporting all within a single reporting package – financial statements accompanied by climate-related and other ES&G reporting, all based on globally accepted international standards (and independently assured). CFOs and their teams will quickly learn the language of sustainability and how to decide what is material for investor disclosure purposes.

Business and Reputational Advantages

In this age of emerging conversations about corporate purpose and multi-stakeholder accountability and trust building, companies are more likely than ever to see business and reputational value in reporting to all stakeholders on their impacts on the environment, society and economies, and contributions to the UN SDGs. For this, the GRI standards must continue to be the gold standard for balanced (not greenwash) sustainability reporting. They can also serve as a useful tool where integrated reporting calls for disclosures about impacts on natural, social and human capital. The spectrum of E&S issues addressed by the GRI standards should also be an important ongoing reference point for the ISSB’s consideration of priorities in its own standard setting. But I do not consider that the concepts or terms “ESG” and “sustainability” are, or will ever, become synonymous. Each serves an important purpose, fulfilling important needs and obligations, for which all actors in the accountability and reporting landscape need to be mutually respectful.

That’s why, in my January blog,[3] I wrote that I was:

“…. delighted and reassured to see that, in January 2022, the GRI (and its recently appointed new CEO, Eelco van der Enden) reaffirmed its commitment to a two-pillar reporting landscape for financial and core sustainability reporting. “Pillar 1 –  addressing financial considerations through a strengthened financial report which includes sustainability disclosures in the context of enterprise value” (the focus of the ISSB), and “Pillar 2  –  concentrating on sustainability reporting focusing on all external impacts a company is having on society and the environment” (the focus of the GRI), which thereby shows its contributions (positive or negative) to sustainable development, the UN SDGs and the possibility for future generations to thrive on a livable planet.“

Further, I wrote: 

“I believe it is critically important that the proponents for, and participants in, the work of both these pillars understand and respect the vital need for both types of reporting and collaborate, whenever the need arises, to promote sustainable business hand-in-hand with sustainable finance.”

Ever the optimist, I am confident that the two-pillar landscape will prove to be viable in what needs to be a quasi-symbiotic relationship, welcomed by investors, companies and all other stakeholders – governments and regulators included. In the EU and Canada, where significant developments are in progress (as noted in my January blog), as well as elsewhere, I hope the observations I have offered above will be helpful.