This year’s COP26 didn’t result in the meaningful achievements that many climate experts were hoping for. Countries are not on track to reduce carbon emissions by half, and the world is still waiting on the robust legislative action needed to tackle climate change.
There was an important, although less eye-catching, outcome of COP26 around sustainability reporting standards setting. During the conference, the Trustees of the International Financial Reporting Standards (IFRS) Foundation launched the International Sustainability Standards Board (ISSB). Although reporting standards don’t get much attention, the standardisation of reporting is a critical factor in not only driving accountability but also in delivering necessary data to spur on legislative and regulatory policy development as well as providing the necessary market signals to support private sector innovation.
The implications of standardised sustainability reporting
ISSB has gained support from standards reporting bodies as well as 40 finance ministers and will likely issue its initial standards in Q3 2022. After a public consultation, countries can adopt the standards or tailor them to meet country-specific requirements. The ISSB structure will focus on four areas: Governance, Strategy, Risk Management, and Metrics and Targets.
Harmonisation in reporting standards will create an environment in which everyone, from consumers to investors, can effectively compare ‘apples with apples’ and allow for the identification of companies which companies are lagging and, even worse, which companies have been guilty of ‘greenwashing’.
This will have major implications for technology companies as failure to report or reporting that reveals the company has fallen short of its goals, will influence both consumer and investor decisions. Consumer choices, particularly younger generations, are increasingly value-driven and underpinned by an expectation that goods and services are produced using sustainable practices. Investors will also be looking at companies’ reporting when deciding how to allocate capital. Additionally, staff recruitment will be impacted, as tech employees demonstrate a higher commitment to sustainability considerations in their employment decisions than other workers in other sectors.
As these reporting standards will highlight which companies aren’t meeting sustainability goals, the public will gain more knowledge and insight into company sustainability practices. Already a host of civil society organisations have been founded whose singular aim is to assess the credibility of sustainability claims being made by prominent industry sector players, expose shortfalls, and lead public advocacy.
In time, this will increase public pressure on governments to develop regulations requiring companies to drastically reduce emissions. Similar to the development of labour laws, as the public learned about company practices and working conditions, pressure grew on the government to regulate the manufacturing industry. As reporting on sustainability practices is standardised and companies begin to file annual reports, public calls for better climate regulations will increase, and MPs themselves will be scrutinised on their efforts to hold polluting entities to account.
Meaningful climate action is only going to be driven through a combination of financing and concrete government action. Dozens of countries, including the US, UK, and EU, have endorsed the ISSB.
Starting in April 2022, and subject to Parliamentary approval, the UK will require over 1,300 UK-registered companies to provide mandatory sustainability disclosures. The government hopes to make these disclosures mandatory for all companies by 2025.
The European Financial Reporting Advisory Group is developing European sustainability reporting standards that will be compatible with international initiatives. The reporting standards will provide investors with the information needed to make investment decisions.
The Security and Exchanges Commissions is currently working on the Climate Disclosure Rule. SEC Commissioner Allison Herren Lee has expressed support for the ISSB and highlighted the importance of sustainability disclosures in addressing the gaps in a voluntary system.
- The trend toward a standardised reporting of environmental impacts will gain pace in 2022 following the announcement at COP26 by the Trustees of the International Financial Reporting Standards (IFRS) Foundation of the establishment of the International Sustainability Standards Board (ISSB). The announcement has been endorsed by TCFD, the World Economic Forum and the International Organization for Securities Commissions (IOSCO), each of these organisations support the ISSB effort, as do the finance ministers from 40 jurisdictions with the first set of regulations expected in HY2 2022.
- This will allow Governments to enforce more requirements to certify the resilience of a company’s business model in response to climate impact. Companies will need to ensure this does not result in a set of fragmented regimes which create unnecessary compliance costs.
- Investors will demand more disclosures of climate-related metrics, climate-related targets, transition plans and financial impacts. ESG will move from just a buzzword to a crucial element in making investment decisions.
- Armed with standardised frameworks which will aid direct comparisons, consumers will increasingly make purchasing decisions based on the sustainability practices of the companies they purchase goods and services from. As climate disclosure becomes mandatory, companies will begin to feel pressure from both consumers and investors to reduce their emissions.
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