Erkki Liikanen, Chair of the IFRS Foundation Trustees, talked about its work to meet the information needs of investors and other capital market participants by creating a proposed new board that would develop a global baseline of sustainability-related disclosures focused on enterprise value
It is a pleasure to be with you today. We both serve investors—you,
as the voice of Chartered Financial Analysts around the world, and the
IFRS Foundation, responsible for high-quality, global standards that
help investors make informed investment decisions.
Today, we are here to talk about sustainability standards, in
particular to ask whether there is a path to global standards. Answering
this question has occupied much of our time as Trustees of the IFRS
Foundation.
Sustainability reporting is a very broad discipline, ranging from
jurisdictional requirements for companies to report against specific
public policy objectives to investors’ need for global comparability of
sustainability-related financial disclosures.
These all are important. The focus of IFRS is to meet the
information needs of investors. There is a path to global sustainability
standards if we, on the one hand, can create a global baseline of
sustainability-related disclosures to facilitate comparability for
investment decision making and, on the other, work with jurisdictions to
ensure compatibility between this global baseline and their own
initiatives.
The global baseline approach has been welcomed and has received broad support from the G7 Finance Ministers, from global regulators in the form of IOSCO,
from investors and corporates around the world, and from other
standard-setting organisations. That said, there remains much work ahead
of us.
Coordinated action
Climate change and sustainability matters are global challenges. They
pose particular difficulties for our societies because of different
incentives between individuals and society at large. Reversing this
dilemma requires global cooperation. One famous effort was the Kyoto
Protocol in 1997. The last global accord was the Paris Agreement signed
in 2015. The US rejoined the Agreement in February. Now, the world is
preparing for the November COP26 meeting in Glasgow.
With climate issues, this dilemma is further complicated by what Mark
Carney refers to as the tragedy of the horizon―where actions required
today have a payback well beyond the normal time horizon. In his recent
book, he defines three pillars for the solution: 1) public policies, 2)
company transition plans and 3) disclosures of climate-related risks and
opportunities.
Achieving goals set out by successive climate summits will require
coordinated action by multiple actors, where each one has a distinct
role to play.
Governments are required to establish clear policy frameworks.
Investors price investment capital based on how those policies will
impact companies in the long term. This in turn provides companies with
an incentive to embrace sustainable business models. The efficiency of
this supply chain is dependent on high-quality, globally comparable
information on which investors can assess sustainability risks and make
informed decisions. This is the role of investor-focused international
standard-setters such as the IFRS Foundation. The role is to enable the
achievement of policy objectives determined by jurisdictions and
international agreements by developing standards that bring consistency
and transparency for the global capital markets.
This separation of roles and responsibilities is made clear in the
book by Nobel Laureate Jean Tirole, who emphasises that economics is a
science of means, not of aims. Common objectives of society largely rely
on values. Governments determine the objectives. Economics and the
market in turn can provide means to meet the objectives at the lowest
possible cost. Tirole continues that the market is an instrument, not an
aim itself. Similarly, disclosure standards do not set the policy
objectives, but they can be a valuable instrument to support the
delivery of those policy objectives.
Demand-driven consultation
There is a broad interest in ESG, and ESG-related investments have grown substantially.
However, research also shows that capital flows to sustainable
investments are impeded by poor data quality. The data lacks rigour and
cannot easily be compared. Many initiatives attempt to improve
comparability, but their numbers have led to greater diversity.
When sustainability reporting can be asked to promote broad public
policy objectives, the responsibility belongs to elected bodies and
institutions and rightfully so.
An additional question has been raised: whether global standards
would be needed in the more limited task of providing
sustainability-related disclosure for investors. This question was often
put in front of the IFRS Foundation due to its experience in financial
reporting. IFRS standards are required for use by more than 140
countries.
When the IFRS Foundation and International Accounting Standards Board were founded with IOSCO’s strong support 20 years ago, financial reporting and climate change did not meet. Now, in 2021, it has all changed.
To prepare our reply to the questions raised, the Trustees started a
strategy review, where the focus was on sustainability reporting. The
first two questions of the consultation paper in September 2020 were: is
there demand for global standards? If so, should the IFRS Foundation
play a role in developing such standards?
We made it very clear that this is a demand-driven exercise. We are ready to serve only if needed.
We received a great number of comment letters to the consultation.
They are all on our website. Overwhelmingly, responses to our initial
consultation show a growing and urgent demand for a single set of global
sustainability-related disclosure standards. A great number of
commentators also wrote that the IFRS Foundation should play a role in
developing these standards.
Reconciling jurisdictional and international requirements
After the consultation, the IFRS Foundation reiterated that is does
not play a role in determining sustainability reporting requirements
required for broader public policy objectives.
At a jurisdictional level, public policy determines
sustainability-related priorities, and they drive what information
companies within each jurisdiction are required to report. For example,
the EU’s proposed Corporate Sustainability Reporting Directive is a key
element of the EU’s Green Deal policy framework. It seems likely that
different jurisdictions—the United States and in Asia―will each
establish different policy approaches, and therefore their
sustainability reporting requirements will also be different.
Internationally, there are multi-stakeholder standards, with the GRI
Standards being the most well-known voluntary standard, and various
sustainability initiatives focused on investors and the capital markets.
These investor-focused initiatives include the work of the Task Force
on Climate-related Financial Disclosures, the Value Reporting Foundation
(incorporating the SASB and the IIRC), and the Climate Disclosure
Board.
The organisations behind these initiatives affirm that consolidation is required.
They have welcomed the IFRS Foundation's proposals to establish a new
International Sustainability Standards Board within the governance
structure of the IFRS Foundation. They are also involved in the
preparations.
Our shared ambition is to introduce a global baseline of standards
for sustainability-related disclosures which are focused on meeting the
information needs of investors globally when assessing enterprise value.
Enterprise value is a key concept, designed to capture expected value
creation for investors in the short, medium and long term, and is
interdependent with value creation for society and the environment.
For example, the global baseline might describe how companies should
disclose the impact of climate-related risks and opportunities, and, for
each identified risk and opportunity, the impact on its financial
performance. This could include capital allocation plans, supply chain
innovation or investments in technology or new business areas.
The new board would begin with climate. Its work would be expected to
move with pace to consider other sustainability-related issues
important for enterprise value.
This investor focus on enterprise value is where the IFRS Foundation
can contribute most. While the proposed board would work on
sustainability-related disclosure standards, its work would be
complementary to the work of the IASB. Sustainability-related factors
are already connected in the financial statements. Investors are
interested in information about sustainability irrespective of its
location within the financial statements or in broader reporting.
Our approach to global standards is market and demand led. The
Foundation provides a setting where investors, regulators, companies,
academics and standard-setters from around the world can work and
problem solve together.
This work follows a transparent and inclusive due process that is
used as a benchmark for other standard-setting organisations. The
process is overseen by the Trustees, who are in turn accountable to a Monitoring Board
of public authorities. Its membership includes IOSCO, the European
Commission, the US Securities and Exchange Commission and others.
The Monitoring Board fulfils a key role in our governance
arrangements, as it provides important linkage to many of the key public
authorities around the world. Moreover, whilst the Foundation is
responsible for the production of IFRS Standards, individual
jurisdictions retain the right to choose whether and how to incorporate
the new standard into their own requirements.
These governance arrangements have evolved over time. The trustees are currently consulting on further amendments to the governance and constitutional arrangements
to accommodate the new board. We welcome feedback and suggestions for
further enhancements. The comment period is open until 29 July 2021.
If the future is jurisdictional and international standards, the key question is how this can be reconciled.
The approach advocated by IOSCO and others is to establish a global
baseline of sustainability-related disclosure standards to meet investor
needs, which would be made available for use by jurisdictions as a base
for public policy needs. We've established a working group to map out
how this could work in practice.
Close
This approach would provide global comparability for investors in a
way that allows jurisdictions to combine the global standards with their
own additional requirements.
To make this work will require political will, compromise and
flexibility from all parties—including the IFRS Foundation. Success is
by no means certain, but if you want global sustainability-related
disclosures for investors, this offers a path.
IASB
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