What Companies Need to Know about the International Financial Reporting Standards Foundation

TUESDAY JULY 13, 2021

By

ADAM FISHMAN, Manager, BSR

#Financial Services, #Future of Reporting, #Reporting and Communications,

“The sustainability reporting landscape is undergoing a transformation” has been a sustainability truism for years now, but the chorus promoting this adage is growing stronger, louder, and more convincing. Why?

We’re finally starting to see tangible change. The International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB) have merged into the Value Reporting Foundation. They and three other sustainability reporting bodies—CDP, Climate Disclosure Standards Board (CDSB) and Global Reporting Initiative (GRI), known as the Group of Five—have called for closer coordination and launched a prototype climate-related financial disclosure standard.

The standard-setters that have historically governed financial reporting are also getting involved. In addition to the SEC, which recently closed a 90-day consultation on potentially mandatory climate disclosure (as well as broader ESG disclosure), the EU has adopted a proposal for a new Corporate Sustainability Reporting Directive and a game-changing EU Taxonomy.

The International Financial Reporting Standards (IFRS) Foundation, which sets reporting standards to “bring transparency, accountability, and efficiency to financial markets around the world,” is also considering how it might engage. Its financial reporting standards, developed and approved by the International Accounting Standards Board (IASB), are required in more than 140 jurisdictions around the world. In a manner similar to the IASB, the IFRS Foundation is exploring whether and how to set up an International Sustainability Standards Board (ISSB).

Feedback on a consultation paper published by the IFRS Foundation in September 2020 indicates strong interest in the organization’s potential involvement in setting sustainability reporting standards to complement financial reporting standards. As a result, the IFRS Foundation is leading a Technical Readiness Working Group to provide a “running start” for the potential ISSB to develop a sustainability reporting standard, based on financial materiality, that provides relevant information to investors.

Governments are supportive of the effort. The G7 Finance Ministers recently voiced their support for the IFRS Foundation to develop a baseline standard, and the International Organization of Securities Commissions (IOSCO) echoed their statement. This baseline standard would build on the Task Force on Climate-related Financial Disclosures (TCFD) framework and the existing work of sustainability standards-setters such as the Group of Five.

We welcome the elevation of ESG data so it is treated with the same level of rigor as financials—comparable, assurable, and recognized as critical to understanding both the impact of material ESG issues on the business and a business’s impacts on the issues.

So, what does all of this mean for you? Here are three opportunities and risks that businesses should know about the potential new sustainability standards:

1. ESG issues are material to a range of stakeholders, and non-investor audiences should also be considered. 

The IFRS proposal and creation of an ISSB will enhance reporting on enterprise value, as well as enable quality and comparability of reporting that yields better decision-making by investors. However, the reporting landscape needs standardization that provides information for stakeholders beyond investors and capital markets. There is a risk that the current framing excludes or supersedes companies’ reporting on their outward impacts on ESG issues in favor of purely the financial dimension of materiality.

2. Reporting standards need to be interoperable across regions and jurisdictions. 

The ISSB would function within the architecture and governance structure of a standard-setting body that has already been adopted by over 140 jurisdictions, enabling immediate scale and uptake of common sustainability reporting standards. However, there remains a need to align with the standards under development in the EU, and a continued question around whether or how the US follows suit (e.g. if the SEC develops a separate system for climate or ESG disclosure). Overall, if the IFRS-developed sustainability reporting standards come to fruition as a global disclosure baseline, they may best serve stakeholders if jurisdictions’ additional requirements are harmonized.

3. ESG issues should be covered by reporting standards. 

Standardized disclosure on a range of ESG issues backed by oversight bodies that link to financial reporting and public authorities is in sight. Climate is a natural starting point given the urgency of the challenge, the existence of the TCFD, and some governments (e.g. the UK and New Zealand) already mandating climate disclosure and others (e.g. the US) now exploring the matter. However, climate alone is too narrow, and the IFRS (and SEC) should reflect the fact that no responsible company today reports only on this one issue. Material non-climate ESG issues such as human rights; diversity, equity, and inclusion; and biodiversity will also need to be reported in a similar manner. This presents a risk that companies will move from a unified report to a collection of issue-specific reports that lack cohesion.

The IFRS Foundation’s recognition that investor-focused standards on enterprise value creation are interdependent with others that center on value creation for society and the environment is a positive step. A company that discloses only on the financial impact of ESG issues remains exposed to business risks stemming from their outward impacts on society and the environment. It is for this reason that both dimensions of materiality are critical; we strongly recommend a building blocks approach to reporting that takes interoperability between the dimensions into account.

A company that discloses only on the financial impact of ESG issues remains exposed to business risks stemming from their outward impacts on society and the environment.

We believe these developments are moving the reporting field in a positive direction. We must not forget, however, that financial materiality is but one lens, and a climate disclosure standard is the first step on a broader path to holistic ESG disclosure. We look forward to seeing the results of the IFRS Foundation-led working group and to continuing our engagement in the process. We strongly advise companies and reporting practitioners to do the same. The outcome will have implications for companies’ reporting governance and approval structures, integration of ESG data with financials, and where and how ESG data points are collected and reported.

This blog builds on insights shared within BSR’s Future of Reporting collaboration. Companies interested in discussing the topic further are welcome and encouraged to join the initiative, which has been closely tracking these developments.