Towards a blueprint for sustainable financial reporting

What are the key elements of IFRS Foundation proposals for standardised metrics for corporate sustainability reporting?


In 30 seconds:

  • There is growing and urgent demand for global standards in corporate sustainability reporting to improve consistency and comparability
  • Many different and sometimes conflicting metrics are being used, resulting in confusion for companies, investors and the wider public
  • IFRS Foundation is well placed to supply the clarity and certainty that investors need
  • Aim is a global baseline of standards to which different jurisdictions can add further reporting requirements in line with local needs and policy goals as required.

Perhaps the first point to make is that the IFRS Foundation did not seek to become involved in plans to bring some measure of standardisation to the currently fragmented landscape of sustainability reporting. Instead, we were pulled into this space by demand from investors
and others for action.

Nor did we rush to give ourselves a key role in any new arrangements. The Foundation carried out extensive consultation last year to try to gauge two essential factors. First, was there a demand for global sustainability standards? Second, if the answer was yes, should the Foundation play a part?

On the first question, we found growing and urgent demand for global standards to improve consistency and comparability. On the second, we found broad support for a role for the Foundation.

These responses led, in turn, to two further questions. Should the Foundation establish a new board to set standards for sustainability reporting, and what would its priorities be?

Climate change tops list of priorities

In terms of priorities, there was no doubt that climate change topped the list. The matter of a new board at the Foundation spurred detailed work in this area, leading to a complete blueprint for an International Sustainability Standards Board, to sit alongside the well-established International Accounting Standards Board. It is envisaged that the two Boards will work closely together. This is important, since risks related to sustainability have an impact on financial accounts.

Sustainability reporting is evolving, so it’s perhaps unsurprising that many different and sometimes conflicting metrics are being used, resulting in confusion for companies, investors and the wider public. There is a growing and urgent demand for consistency of reporting and comparability. Indeed, both the International Organisation of Securities Commissions (IOSCO) and the finance ministers and central bankers represented in the Group of Seven (G7) leading economies and the G20 have lent their support to the creation of a new board that will develop global baseline standards.

Four key principles

We analysed the feedback from our consultation and used it to draw up four key principles for the strategic direction of the proposed Board.

The first was that the sustainability reporting would be investor-focused. This principle fell naturally into two parts; a demand side and a supply side. In the former, investors wanted more useful, globally comparable sustainability information that would allow them to assess more accurately the sustainability risks and opportunities involved with each company, leading to better informed asset-allocation decisions.

Regarding the latter, we considered that the IFRS Foundation was well placed to supply the clarity and certainty of sustainability reporting sought by investors. The Foundation has two decades’ experience of service to investors and other capital market participants; it has an established model of governance, standard-setting expertise and well-recognised due process; and it offers the potential for synergies between sustainability standards and IFRS accounting standards.

Sustainability reporting ought, we concluded, to look at likely effects on “enterprise value” over the short, medium and long term, this being the bedrock on which investors can base decisions of asset allocation. This investor focus is very much in our DNA and other bodies, better placed than we are to address the broader societal needs of sustainability reporting, will, we hope, do just that. That said, we would expect enterprise value and social value to be highly interdependent.

Our second principle was that the proposed board would not be starting from scratch. Given there are existing investor-focused, voluntary sustainable reporting initiatives on which to build, there was no need to reinvent the wheel.

Instead, we would develop existing relationships with such bodies as the Task Force on Climate-related Financial Disclosures (TCFD), the World Economic Forum, the Value Reporting Foundation and the Climate Disclosure Standards Board.

We are working together with these organisations through a Technical Readiness Working Group to accelerate the convergence of their voluntary standards. We are also discussing full consolidation of the investor-focused sustainability standard setters as an option. IOSCO and IPSASB are attending the working group as observers.

Our third principle is that there should be a global baseline of reporting standards upon which different jurisdictions can, if they wish, add further reporting requirements in line with local needs and policy goals. This baseline can best be envisaged as three building blocks.

At the bottom is conventional financial reporting as it has always been practised, informing investors on the condition of the company expressed in monetary data.

Next come sustainability related financial disclosures, spelling out for investors any sustainability matters that may reasonably be expected to create or erode enterprise value over the short, medium and long term.

The third and final building block widens the focus from solely investors to take in the broader group of stakeholders. Here, disclosures will relate to all factors that can reasonably be expected to have a positive or negative impact on people, the economy or the environment.

“We established the principle of climate first, not climate only. We have to start somewhere, and climate change is the issue of the hour”

Climate first, not climate only

Finally, we established the principle of “climate first, not climate only”. We have to start somewhere, and climate change is the issue of the hour. But we expect to move at speed to meet investor need for other sustainability-related disclosures; all the time leveraging the work of existing standard setters.

If all proceeds smoothly, the proposed International Sustainability Standards Board will be an organisation of enormous importance in the life of businesses round the world. This makes it imperative that the board displays the highest levels of corporate governance and accountability to stakeholders.

To this end, we propose 14 board members; the majority of whom will be full time, selected on the basis of both professional experience and the diversity of such experience. The search for the Chair and Vice Chair has already started.

In addition to the Technical Readiness Working Group, we have formed a Multilateral Working Group, undertaking preparatory work on the connection between the global baseline standards from the Board and the requirements of different jurisdictions across the world. We recognise that countries may have different levels of ambition with regard to sustainability reporting, reflecting public policy considerations.

Need for a common baseline

But we have to make sure that the baseline is common so as to avoid excessive complications for preparers operating in multiple jurisdictions. The input of securities regulators for the construction of the baseline is therefore important, so we envisage that the multilateral working group will be a feature of the new governance once the new board is established. (It should be stressed that countries will have a variety of models for integrating the standards in local legislation.)

Legitimacy of standard setters comes from appropriate governance. This is the strength of the IFRS’s three-tier governance structure. Public accountability derives from IFRS Foundation Monitoring Board chaired by IOSCO and includes securities regulators, as well as the European Commission and, in some cases, the Ministry of Finance. The IFRS Foundation Trustees are responsible for oversight and strategy, while the standard-setting boards are responsible for developing the technical-content standards.

Funding for the Board is clearly an important issue and comes under two headings. One is the need for seed capital to create the Board and support it through its early years. The other is access to diversified funding for the medium and longer term.

Support from Canada

In July a meeting of the IFRS Foundation trustees was told that Canada’s Deputy Prime Minister and Finance Minister Chrystia Freeland had written a letter on behalf of Canada’s government “and a coalition of over 55 Canadian public and private institutions” which “expressed support for the proposed ISSB and offered seed capital…from a broad coalition of Canadian public and private institutions to fully support the initial period of the ISSB’s operations.”

Ms Freeland wrote: “The development of global sustainability standards by the ISSB, within the robust governance structure of the IFRS Foundation, would help address the need for more consistent, comparable and decision-useful reporting on climate change and other environmental, social and governance factors.”

Chair of the Trustees Erkki Liikanen welcomed the support, saying: “[The Trustees] noted amongst other things that the letter acknowledged the independence of the IFRS Foundation’s standard-setting operations and explained how Canada would be able to support and facilitate establishing an organisation with a global professional workforce.”

I stress that this remains a “potential” board and we are now analysing feedback on our consultation before reaching a final decision. Fittingly, we will reach that decision by the time of the UN Climate Change Conference, COP26, in Glasgow this November.

Many people and organisations are willing us to succeed in this endeavour and we have been cheered by all the support and goodwill. To some, accounting standards may seem a dry-as-dust topic – but, as COP26 shows, sustainability is the central issue of our time.


Lucrezia Reichlin is Professor of Economics at London Business School



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