There is a growing and urgent demand for common ESG standards and regulations. Will a newly formed IFRS Task Force succeed in establishing an effective Sustainability Standards Board? The international community weighs in.
A Common Message
Notwithstanding differences in scope and motivation, all stakeholders share a common message: there is an urgent need to improve the consistency and comparability in sustainability reporting. - IFRS Trustee Task Force, September 2020, Consultation Paper on Sustainability Reporting.
The diverse set of stakeholders mentioned above can all agree on at least one thing. The current landscape is fragmented. Not only do ESG standards compete and overlap, but also they are inadequate to meet market needs.
In a time of social unrest and consumer tech dominance, the above stakeholders would likely agree on another key piece: the future of sustainable growth requires collaboration that exceeds what is possible today.
Broad Consensus
The IFRS appears to be right on target. Their Consultation Paper quoted above also mentions that “A broad consensus holds that the current practice of sustainability disclosure is inefficient and sometimes ineffective due to a lack of commonly accepted standards and the inability to compare the information reported or provide assurance.” Their process of seeking comment on their Sustainability Standards Board (SSB) proposal demonstrates a big-tent approach. On the supply side, there is an industry in transition driven by differing use-cases. On the buy-side, retail investors may use an ESG Rating system provided by their preferred trading platform, whereas a banking institution may have a proprietary system. To grow beyond these roadblocks, the consensus demand is to develop a consolidated international taxonomy and set of standards.
Finance + Sustainability
The orientation of the IFRS brings together mainstream financial reporting and sustainability data under one set of standards. There should be no separation of ESG data and common financial metrics, where one is held as a separate issue from the other. Together they offer a more complete view of company health. All stakeholders, even those outside the financial community, deserve access to sustainability reports, writes one comment letter. This reflects the desire for broader access, and cross industry collaboration. The current fragmented standards landscape inevitably produces inefficiencies that reduce collaboration potential. If I choose one framework to evaluate my portfolio, and your company chooses another, it will be very difficult to measure progress towards common goals.
Efficient Allocation of Capital
Efficient capital markets will be key to the transition to a low-carbon economy. They will also be key to re-employing the daunting number of workers who have been immobilized by the pandemic. Getting businesses rebuilt in sustainable ways needs a public reporting component as a common yardstick for measuring success. These pressures explain the IFRS Task Force's use of the language of "urgency", as this is clearly a pivotal moment in time. Opportunities to rebuild after global crises are rare. This time around, data is key to creating equitable opportunities that contribute to a sustainable recovery.
Beyond Borders
Perhaps that explains the depth of responses, both passionate and professional, that we came across as we read the comment letters. For example, the Global Financial Markets Association represents the interests of market participants at the international level. Their comment letter supports the IFRS and also offers that current standards not be thrown out. According to the GFMA, those fragmented providers and rating systems represent many potential solutions to specific problems, so the SSB should "evaluate the current sustainability reporting landscape to identify optimal ways on how the harmonization should be achieved, building upon existing initiatives." The general sentiment is to use what is working and bring it into a single working whole. Of course, today's solutions are localized, whereas the problems are global and exceed borders. This may explain why many respondents called for key performance indicators (KPI) that could be internationally comparable.
Equitable Opportunities
The IFRS is uniquely situated to harmonize these many standards because they have extensive experience with good governance and data transparency. Existing infrastructure is key to generating enough momentum to bring key stakeholders to the table and eventually work towards large-scale adoption.
At idaciti, we're already developing ESG solutions that integrate with our existing products. We view everything through the lens of technology - we like to think of ourselves as some of the foremost users of the XBRL revolution that the SEC brought about in financial reporting. Starting from this extensive infrastructure will bring our technology to bear on the new ESG data faster than ever.
Do these new standards need to be equitable, inclusive, public? Those are key pieces to creating lasting change in the status quo. It sounds like the global community is more than ready for the SSB to produce a common taxonomy. We are keeping up to date with significant developments in ESG data reporting to ensure that idaciti continues to lead the way in bringing XBRL-powered data to market participants.
In the coming weeks, we will continue to discuss the ESG standards and our role in better understanding the equity landscape today. Feel free to follow our company page on LinkedIn, or reach out to info@idaciti.com for more information on idaciti's range of data products and services.
