In 1989, when the Exxon Valdez ran aground in the Gulf of Alaska, few could have predicted the long tail of impacts. Almost 11 million gallons of crude oil spilled from the tanker and spread 1,300 miles along the coast of a pristine wilderness, exterminating bald eagles, sea otters, whales and other wildlife. The focus was initially on cleanup and apportioning blame; then on passing laws in the United States to prevent and strengthen preparedness for future spills and establish the legal liability of responsible parties. But responses to the disaster also helped lay the foundations for the recent crop of standard setting on sustainability reporting and disclosures.

The scale of the environmental disaster and public outcry led in 1997 to the Global Reporting Initiative (GRI), which created the first global framework for sustainability reporting, GRI Guidelines, in 2000 and first global standards for sustainability reporting, GRI Standards, in 2016. Their adoption and influence have been widespread; likewise, the 2017 recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The GRI and TCFD then helped to spur and shape many subsequent voluntary and mandatory requirements for reporting and disclosing information on sustainability matters. 

Examples include the Corporate Sustainability Reporting Directive, adopted by the European Union in 2023, which requires compliance with European Sustainability Reporting Standards (ESRS) developed by the European Financial Reporting Advisory Group (EFRAG); various sustainability reporting requirements that have been developed by jurisdictions such as the United Kingdom, United States and others; plus the formation of the International Sustainability Standards Board (ISSB), part of the IFRS Foundation and sister board to the International Accounting Standards Board (IASB), and its global baseline of standards for sustainability-related financial disclosures, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. It is pretty evident from the varied list of standard-setters across many jurisdictions that we now need further global harmonisation of sustainability standards to build on the considerable strides forward that have already been made. 

Against this background, ICAEW has continued to play a leading role in sustainability reporting, working closely with governments, regulators, standard-setters and other agencies. Now ICAEW’s Corporate Reporting Faculty has published a report, Shaping sustainability standard setting, which analyses accounting standard setting using traditional and established practices as a point of reference, and looks at the challenges faced by sustainability standard-setters based on outreach to a wide range of stakeholders. Recommendations and observations from this analysis are outlined in the report along with lessons for sustainability standard-setters.

Facing the challenges

While recent endeavours in sustainability reporting have been well intentioned, the consequences now present challenges for standard-setters and stakeholders. Diversity of approach; lack of consensus on fundamental issues such as purpose, scope and audience; the potential for disclosure overload; the complexities of navigating and applying multiple sets of standards; and the challenges of edging closer to a widely-applied global baseline for sustainability reporting and disclosures are just the beginning. Perhaps it’s time to reflect on what has been achieved and how future sustainability standard setting might be done even better.

“I think now is the right time for ICAEW to look at this because of the proliferation of standard setting in this space,” says Seema Jamil-O’Neill, Technical Director of the UK Endorsement Board. It’s important to remember, Jamil-O’Neill says, that standards for reporting on sustainability should make the information provided by companies more easily understood, comparable and provide a higher level of transparency. This may be so for some individual standards, but collectively they can have the opposite effect. 

“A lot has come about in a tremendously short span of time,” says Mark Vaessen, President of Accountancy Europe and KPMG Partner in the Netherlands. “The first few standards that were issued by EFRAG and the ISSB came at a speed that was unparallelled for those who are used to accounting standard setting.” 

Strengthening the roots

“It’s time to look at how the system can be stabilised,” says Vaessen. “We need more harmonised standard setting.” Any global baseline for sustainability reporting and disclosures will need to address a variety of sustainability issues and the information expectations of an increasingly wide range of stakeholders. Building a global ecosystem to enable this will require all affected standard-setters to collaborate more effectively; agree on fundamentals such as the purpose, scope and audience for sustainability reporting; and clearly articulate the particular role of their standards.

“Sustainability is a new area of reporting for many companies and a significant step that many are having to take, particularly in relation to ESRS,” notes Michael Stewart, Senior Expert on Financial Reporting at Huawei and former Technical Director at the IASB. Like ICAEW and other stakeholders, Stewart sees the importance of clarity from standard-setters on the purpose, intended audience and objectives of reporting. “That’s needed to enable companies to implement standards in a way that meets those needs, whether we are trying to achieve some form of greater consistency or a global baseline.”

The ISSB was formed with the long-term vision of creating a high-quality, comprehensive global baseline of sustainability disclosures, and stakeholders want a coherent and detailed roadmap explaining the desired destination and how the ISSB intends to reach it. “A strategic plan is important,” says Jamil-O’Neill. “Significant effort is going into developing these standards at an international level and stakeholders need to be aware of what’s happening over the next year or two as well as where we are heading over time.”

“I fully endorse the report’s call for a long-term roadmap,” says Vaessen. Some jurisdictions are considering the ISSB sustainability standards as a basis on which to build their own, or are already doing so. Many of those national jurisdictions have seen first hand how well the structures of the IFRS Foundation can support such endeavours and might reasonably expect the ISSB to learn as much as it can from the standard-setting model that has enabled and supported the global success of the IASB. Vaessen adds: “We are building an ecosystem as we go”.

The IASB’s Conceptual Framework for Financial Reporting could offer a template to guide future sustainability standard-setting. It contains two fundamental principles: relevance and faithful representation. Says Stewart: “These could be the exact same fundamental principles for sustainability reporting standard setting.” The principle of relevance and its entity-specific companion materiality would also aid development of sustainability reporting standards that can be widely applied and minimise potential for disclosure overload.

Doing it the right way

The report’s call for taking a principles-based approach also has support. “At an international level, standards have to be developed in a principles-based way, so that they can be applied to a diverse range of companies, with different business models, across different jurisdictions with different legal constraints,” says Jamil-O’Neill. Another factor in the successful development of widely applicable global standards is high-quality due process, such as open public consultation, which allows for international debate, and improves stakeholder engagement and understanding of issues that are shaping decision making on standard setting.

“Working at the IASB I saw how critical it is that due process is done in a structured, transparent and inclusive way, to give all stakeholders an opportunity to express their views and thoughts on standards being developed,” says Stewart. Expert and independent due process that can resist political pressure is especially important for standard-setters such as the ISSB without a statutory footing, and should continue after standards are issued. “It is sometimes through implementation of standards that we learn how to better craft them and better focus them on key information that will make more of a difference to users,” adds Stewart. 

Making it work

Standard-setters such as the European Commission, as advised by EFRAG, and the ISSB are focussing on what can be done individually and collectively to make it easier for their various standards to co-exist in a world where theirs are not the only established or emerging voluntary and mandatory standards for sustainability reporting and disclosures. If stakeholders who have contributed to and commented on ICAEW’s ‘Shaping sustainability standard setting’ report and recommendations are any indication, matters such as interoperability, implementation, assurance and enforcement loom large.

“I agree with the report’s recommendations on the near-term need to focus on interoperability, implementation support and interpretation,” says Vaessen. There is interoperability guidance from EFRAG and the IFRS Foundation on the regional ESRS and global ISSB standards, mapping their alignment and illustrating how a company can apply both sets of standards. This was necessary because EFRAG and the ISSB started from different places, but going forward a unified approach could be taken on planned sector standards and leverage work that’s already been done by organisations such as the GRI. 

“There is an opportunity to create together one global principles-based standard,” says Vaessen, then if the ISSB, Europe or another jurisdiction wants to add to or supplement it with rules and regulations or guidance they can – as they do with international standards for financial reporting and audit. When EFRAG was developing its topic-specific sustainability standards on matters such as biodiversity and ecosystems, and pollution, it collaborated with the long-established GRI, and its work could be leveraged by the ISSB going forward if, for example, its climate-specific standard IFRS S2 is to be joined by other topic-specific standards.

The report emphasises that implementation should also be a priority for the ISSB. National jurisdictions, including the UK, have committed to developing mandatory sustainability reporting standards based on IFRS S1 and IFRS S2. “It’s important that these are implemented in a way that the resulting information prepared by companies is globally comparable. This will mean the standard-setter will have to put a lot of effort into implementation,” says Jamil-O’Neill. “The intention should always be that those standards are implemented. That gives the standard-setter the credibility to be able to continue to develop standards in the future.”

For Stewart, it’s important for future standards to build on what is learnt during implementation. “A huge amount of experience will accumulate as many more companies than have done so to date start reporting on sustainability. People are giving a lot of thought to the development of these standards, with the expectation that standard-setters will listen and respond to feedback.” 

People are also thinking about the need for consistent post-implementation assurance and enforcement. The ecosystem will need this as it matures. “Investors want sustainability reporting to be as robust as financial reporting, so we must ensure that the standards are ready for assurance,” says Vaessen. International Standard on Sustainability Assurance 5000, the sustainability assurance standard recently approved by the International Auditing and Assurance Standards Board, is good news; so are signs that multiple jurisdictions will be allowing its use. 

“We are just starting out,” says Jamil-O’Neill. “Over time I think the sustainability standard setting trajectory is towards an international baseline that jurisdictions can add to. But it’s not going to be a straight line.”