Policy Corner | September 27, 2021

Global standards for sustainability accounting must be holistic and inclusive

Krisztina Tora
Guest Author

Krisztina Tora

When global leaders converge on Glasgow in November for the COP26 climate summit, all eyes will be on the pledges that politicians make to address the climate emergency. 

A quieter, but in many ways highly significant, announcement also is expected to be made at the conference. The International Financial Reporting Standards Foundation, or IFRS, which sets reporting and accounting standards for companies in 166 jurisdictions worldwide, is expected to launch an International Sustainability Standards Board, and its first ever roadmap towards sustainability reporting. 

It will mark a historic milestone. At present, there are at least a dozen widely used reporting standards – from the recommendations of the Task Force on Climate-related Financial Disclosures, or TCFD, to Europe’s new Sustainable Finance Disclosure Regulation, or SFDR. That leaves investors and corporations with a complicated ‘alphabet soup’ of different reporting standards and requirements.

The new Sustainability Standards are expected to go further than ever by providing a comprehensive approach to reporting on sustainability impacts. This will finally make it possible for investors and stakeholders to consistently account for and compare the positive and negative impacts of investments and businesses on people and the planet.

Over the years, the National Advisory Boards from 33 countries that make up the Global Steering Group for Impact Investment have been telling us that a globally recognized reporting framework is crucial to developing impact economies that work for people and the planet. Those national advisory boards are local platforms that unite investors, policymakers, regulators, businesses and non-governmental organizations to drive forward national agendas for change. The goal is to channel capital to achieve the Sustainable Development Goals in their country, which they meet through education, market intelligence, policy change and establishing new impact funds.

Local practitioners

The National Advisory Boards, or NABs, are local champions, making impact investing bigger, better and more impactful on the ground. They need one set of standards that work for all businesses, big and small. Not another set of standards designed by wealthy economies creating new barriers to entry for small and medium enterprises or businesses from other regions of the world. 

The IFRS ran an open consultation process to which the Global Steering Group responded in July. In our consultation response, we welcomed the IFRS’s dynamic definition of materiality. Why? Firstly, it defines materiality as something that would affect enterprise value creation or erosion, not just profits. Secondly, it considers medium and long-term impacts, not just short-term impacts. (This is incredibly important as sustainability impacts may not manifest for many years.) And thirdly, it recognizes the dynamic nature of materiality – what can affect business value today can change quickly, as issues, such as the renewed Black Lives Matter movement, come to the fore. We think this approach is more forward-looking than traditional approaches to materiality and is appropriate for the role that the IFRS plays in the market. 

There is one aspect where we feel it is important to further push the thinking. We know that climate has been identified as a priority topic by the IFRS Foundation. However, we think it is paramount to approach sustainability standards through a combined environmental, social and governance lens. It will be crucial to expose interdependencies between sustainability dimensions to ensure that all risks and opportunities that matter to creating enterprise value are accounted for.

Our work with the NABs has also convinced us that more needs to be done to represent the needs of local practitioners in the creation of sustainability standards. This should start with who gets to have a say in the process.  

Currently, both the existing governance structure of the IFRS Foundation and the proposed governance of the new International Sustainability Standards Board are skewed towards the wealthiest economies. The African continent is underrepresented. We think this is unacceptable. More needs to be done to ensure that individuals selected for these roles come from a diverse range of backgrounds. Those who live in communities that will be most affected by climate change – and have the greatest stake in making progress towards the SDGs – should have an important role in designing global sustainability standards. 

While these global standards will be crucial to the development of impact investing in the years to come, the needs of local partners should always be at the fore. We expect that the national advisory boards will again be at the vanguard. They are already flagging to national governments and regulators that change is coming and have been delivering training on how to manage and measure sustainability impacts. 

IFRS Standards have become the de facto global language of financial reporting across the world. But it will only be through the efforts of local partners and their work with governments that the sustainability standards become meaningful in all contexts.

Imagine the scale of transformation ahead: a world where we can compare all companies based on the impact they create. 

Krisztina Tora is the Chief Market Development officer of the Global Steering Group for Impact Investment.