IFRS Proposes Sustainability Standards Board

IFRS launches consultation paper on the future of non-financial reporting regulation

Lucrezia 1140x346

The International Financial Reporting Standards Foundation (IFRS), a non-profit body that sets accountancy rules, has issued a consultation paper proposing a sustainability standards board for non-financial reporting regulation.

A task force, set up at the behest of the Trustees of the IFRS Foundation (Trustees) in October 2019, prepared the document, ‘IFRS Foundation Consultation Paper on Sustainability Reporting’, which is open for public consultation until the end of 2020. The ambition is to identify the demand from stakeholders in the area of sustainability reporting and to understand what the Foundation can do to minimise the reporting burden on companies and achieve the optimal results for users of company sustainability reporting.

The move comes at a time when five sustainability organisations - the Sustainability Accounting Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council, the Carbon Disclosure Project (CDP), and the Carbon Disclosure Standards Board – have announced a plan to work together to develop a global reporting system. The Big Four accountancy firms have also recently unveiled their own ESG reporting framework.

London Business School’s Lucrezia Reichlin, a trustee of the Foundation and chair of the task force, said that the IFRS would be working closely with such existing initiatives with the aim of achieving a globally recognised framework to replace the piecemeal standards used by companies to highlight their efforts in sustainability management. The goal will be to start with climate as a priority.

Recognising that governments and regulators are also responsible for sustainability, Professor Reichlin said that a key advantage of having a board on global sustainability reporting under the IFRS umbrella is the hybrid governance of the IFRS, involving public policy agencies, regulators and the private sector.

“The IFRS acknowledges the key role the task force on Climate-related Financial Disclosures (TCFD) plays in organising the reporting framework to support the low-carbon reform of companies. Furthermore, it recognises the work undertaken by the UN special envoy for climate action and finance, Mark Carney, and other key actors in this field. It is crucial that we all work in tandem with each other,” observed Professor Reichlin, who also acknowledged the efforts of LBS’s Professor Alex Edmans in his examination of corporate governance, responsible business, and behavioural finance.

Reichlin added that the goal of mandatory global standards needs to recognize that national policies have different degrees of ambitions on climate targets and different public policies. Global standards should not come at the expense of delaying the most advanced countries’ effort. “Public policy is so different in terms of meeting Environmental, Social and Governance (ESG) criteria. For example, the EU and UK are well advanced in terms of implementing policy on environmental principles and accountability, but others countries are less well developed. Within the private sector, the Foundation is directing its efforts to achieving a more global and synergistic platform that will give investors the information needed to understand the risks companies face, while minimising the reporting burden currently placed on companies.”

Professor Reichlin is hopeful that the paper, which closes for comment on 31 December 2020, would eventually address concerns related to, for example, double materiality, and the shortcomings of quantitative disclosures, objective targets and the associated assessments of whether organisations were meeting their targets.

Emphasising the importance of data to identify and address threats, Professor Reichlin said that there is currently insufficient description of risks and disclosures, particularly with regard to environmental and climate change-related matters

“There is often a significant difference between meeting the basic requirements and providing good disclosure,” added Professor Reichlin.

Professor Reichlin said she hoped the paper would stimulate a grouping of the best ideas of companies, standards boards and government policies to produce a robust global reporting system.

The IFRS Foundation states that its mission is to develop IFRS Standards that bring transparency, accountability and efficiency to financial markets around the world, and that their work serves the public interest by fostering trust, growth and long-term financial stability in the global economy.

Consultation Paper on Sustainability Reporting is published by the IFRS Foundation Trustees for comment only. Comments need to be received by 31 December 2020 and should be submitted by email to commentletters@ifrs.org or on the ‘Open for comment’ page at www.ifrs.org/projects/open-for-comment/.

Professor Reichlin discussed the IFRS consultation paper at a green summit on Monday, November 9th 2020, on an online discussion panel shared with the ex-chair of the US Securities and Exchange Commission Mary Schapiro. They discussed “raising climate ambition among financial market actors”. These market actors need to share climate information that is “decision useful”, they agreed.

Former Bank of England governor Mark Carney chaired the discussion.