Global rule maker created for ESG disclosure standards

Dive Brief:

The supervisor for global accounting rules announced Wednesday the creation of a board to draw up corporate disclosure standards for environmental, social and governance (ESG) practices, including carbon emissions.
The launch of the International Sustainability Standards Board (ISSB) at the COP26 climate conference in Glasgow responds to rising pressure from investors, lawmakers and other stakeholders for consistent, standardized rules for ESG disclosure. Currently, CFOs aiming to adopt ESG disclosure standards must choose from more than 15 competing sustainability reporting frameworks that vary in detail and scope.
The ISSB “standards will form a comprehensive global baseline of sustainability disclosures,” according Erkki Liikanen, chair of the trustees for the IFRS Foundation, which oversees the International Accounting Standards Board. “They can be used on a standalone basis or integrated into jurisdictional requirements to serve broader stakeholder or other public policy needs,” he said at Glasgow, noting “overwhelming demand for global sustainability standards.”

Dive Insight:

Securities and Exchange Commission (SEC) Chair Gary Gensler has said agency staff will consider global standards while crafting by early next year a proposal for mandatory climate risk disclosures for consideration by SEC commissioners.

Companies may need to report on metrics such as greenhouse gas emissions, financial impacts of climate change and progress towards climate-related goals, Gensler said in July, adding that he aims to ensure investor access to “consistent, comparable, and decision-useful disclosures.”

Such reports may be required in an expanded Form 10-K and describe a company’s direct and indirect carbon emissions, including those by suppliers and partners in its “value chain,” he said.

The SEC rules will likely parallel, but not duplicate, global standards. Gensler has also asked staff to propose workforce disclosure rules.

The ISSB plans to gather opinions from shareholders, companies and other stakeholders and release an initial group of standards during the second half of next year. “It will begin with climate, due to the urgent need for information on climate-related matters,” and draw up both thematic and industry-based requirements, according to an IFRS statement.

The ISSB aims to become the global standard-setter for sustainability disclosures, building on several current reporting frameworks including from the Climate Disclosure Standards Board, the Task Force for Climate-related Financial Disclosures (TCFD), the Value Reporting Foundation’s Integrated Reporting Framework, Sustainability Accounting Standards Board and the World Economic Forum’s Stakeholder Capitalism Metrics.

Since assuming office in April, Gensler has advanced an SEC review of its regulation of climate disclosures, gathering more than 550 public comments on its push for detailed transparency.

The SEC may require companies to give climate change details the same prominence as other core information that they provide to investors, Gensler said in July. “I’ve asked staff to consider whether these disclosures should be filed in the Form 10-K, living alongside other information that investors use to make their investment decisions.”

Companies may need to provide scenario analysis on how they would adapt to a range of physical, legal, market and economic impacts from climate change, including the costs and risks of cutting carbon emissions, he said.

“I believe it’s with mandatory disclosures that investors can benefit from that consistency and comparability,” Gensler said. “When disclosures remain voluntary, it can lead to a wide range of inconsistent disclosures.”

SEC staff will also consider whether to mandate distinct metrics related to climate change for specific industries, such as banking, insurance or transportation, Gensler said.

The stakes of disclosure are rising for publicly-traded companies as both institutional and retail investment surges into assets tied to ESG principles.

Global ESG investment soared 55% to $35.3 trillion last year from $22.8 trillion in 2016, according to the Global Sustainable Investment Alliance. The total will probably exceed $50 trillion by 2025, making up more than one third of the projected $140.5 trillion in global assets under management, according to Bloomberg.