A new global baseline

Sue Lloyd was appointed Vice-Chair of the International Sustainability Standards Board (ISSB) early this year and took up her new post on 1 March 2022. She brings a wealth of standard-setting experience to her role, having been a member of the International Accounting Standards Board (IASB) since 2014 and its Vice-Chair since 2016.

We met with her at the IFRS Foundation’s London offices to discuss the challenges that lie ahead as the newly formed ISSB, which was launched at last year’s COP26 Climate Change Conference in Glasgow, seeks to answer the growing call for high-quality and comparable disclosures on climate-related and other sustainability matters.

Informed investment decisions

We started by asking Lloyd what had drawn her to this new role. “I’m excited to take on this new challenge as it creates an opportunity to use my experience to assist in delivering the sustainability standards that global markets need,” she says. “I see this as a chance to use my standard-setting skills in a new and exciting context.”

She explains why the ISSB has such a key role to play in the years ahead: “Corporate reporting is changing, with investors and other capital market participants asking for more information about companies’ sustainability-related risks and opportunities to help them assess enterprise value and make informed investment decisions. But if that information is to be really useful, it needs to be prepared with the same rigour as information in the financial statements. Our aim is to produce a comprehensive and high-quality suite of sustainability disclosure standards that can be used by market participants around the world.”

There is no doubt that this is a hugely ambitious project. But Lloyd believes that the ISSB is well placed to achieve its goals. “Sustainability is a subject that everyone is interested in right now, meaning there’s real momentum behind this project,” she says. “We’ve received support from public authorities and market participants around the world, including, importantly, the G20, the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board. Having their support provides a real catalyst for jurisdictional adoption.”

Importantly, the ISSB has no power to require anyone to adopt its standards, so getting buy-in from jurisdictions is really important to the success of the project. But the EU and the US, among others, have already started their own sustainability and climate-related initiatives. So, are we really heading towards a global solution or is there a danger of continuing with fragmented and conflicting requirements in different countries?

Lloyd believes it is the former: “There are some issues around timing, as some jurisdictions started work on their sustainability projects before we did. But we are working closely with them to ensure that our approaches are as aligned as possible. To this end, a new jurisdictional working group has been created to capitalise on the opportunity of having several sustainability proposals out for comment at the same time. This group is to facilitate dialogue with bodies representing jurisdictions such as the EU, the US, the UK, China and Japan in order to find opportunities to bring the proposals together. We are also creating a permanent advisory body – the Sustainability Standards Advisory Forum – to enable regular and ongoing dialogue with a broad set of jurisdictions. Working together through these forums, I believe we can develop compatible solutions that form a global baseline that individual jurisdictions can build on according to their needs.”

Quality

The ISSB is, of course, a very young organisation. But it has been able to hit the ground running by building on the work of and consolidating existing international bodies – such as the Climate Disclosure Standards Board and the Value Reporting Foundation – into the IFRS Foundation. As Lloyd explains: “We’ve benefited hugely from the work that these organisations have done in the past and the experience that their staff members bring to the table. Rather than having to start from a blank page, we have been able to build on their existing materials. This has been incredibly helpful when developing the two Exposure Drafts that we issued recently on general sustainability-related disclosures and climate-related disclosures.”

While the aim is to issue the ISSB’s first standards later this year, Lloyd is keen to emphasise that they will not be rushed into publishing anything until they are ready: “The aim is to finalise these two projects before the end of 2022, but we need to ensure that we give ourselves enough time to properly assess the feedback that we receive on our proposals, including on when the effective date of the new standards should be. We want to do things on a timely basis, but we must always listen carefully to the views of stakeholders and jurisdictions. We can only succeed if the solutions we come up with are acceptable to them. We are building a global baseline so it is worth spending the time to make sure we get it right. The quality of what we produce matters.”

A journey

While there is clearly an eagerness to move forward quickly, there is also an acknowledgment that the ISSB needs to exercise caution. Lloyd sees the process as a journey: “It may take several years to get to where we want to be and there may be some bumps in the road along the way. But what is important is finding a way to drive behavioural change. Requiring companies to make sustainability-related financial disclosures about governance, strategy, risk management, and metrics and targets means that boards will have to talk about these issues, and this should enable them to make the connections between addressing sustainability issues and building this into business planning.

“That in itself should be a catalyst for changing organisational behaviour. Providing these disclosures will facilitate informed investor decisions about the allocation of capital, assisting in the transition to a low-carbon economy.”

The potential rewards that would come with the successful implementation of the ISSB’s vision of high-quality, globally comparable sustainability standards are clearly significant. But other changes to the wider reporting landscape are needed if the implementation of the new standards is to be seen as a success. Lloyd explains: “IOSCO’s support for our standards is important. Such support will provide impetus for jurisdictions to require companies to use them. But even then, there is more to do. An assurance infrastructure will also need to be developed to ensure investors feel that they can rely on the information being disclosed and regulators will need to assess whether everything is being implemented correctly. So, there are many pieces that need to fall into place.”

A busy agenda

Sustainability reporting is, of course, about more than just the climate crisis. The ISSB has started with this topic as it is widely accepted that there is an urgent need for information on climate-related matters. But, as Lloyd explains, the ISSB will be looking at other environmental, social and governance topics in due course: “While finalising our two initial standards is our priority, we have lots more to think about in the months ahead. Later this year, we will be consulting on what our priorities should be going forwards, with topics such as biodiversity and water-risk – among others – candidates for inclusion on the agenda.

“We’ll also be thinking about how to develop industry-based requirements, building on the work of the Sustainability Accounting Standards Board and working closely with the IASB on its management commentary project. Our desire to be digital from day one means we will also be consulting on our proposed taxonomy later this year.”
Is there any appetite for developing standards for small and medium-sized entities? Lloyd explains that it depends on what is meant by small and medium-sized entities. The ISSB isn’t currently planning separate standards for entities without public accountability similar to the IASB’s IFRS for SMEs accounting standard.

“Our starting point is developing standards that are suitable for global capital markets. We currently have no evolved thinking on developing standards for smaller, privately-owned businesses – although the two Exposure Drafts that we published recently do ask questions about scalability so we can consider the effects for businesses of different sizes. Individual jurisdictions, however, decide which entities will be required to apply our standards and they could choose to allow or require the use of the standards for unlisted companies,” she says.

Conclusions

ICAEW believes that the formation of the ISSB is a major step in the right direction when it comes to establishing global sustainability standards, but there is clearly much work to do to ensure the project’s success.

Is there a role for professional bodies such as ICAEW in all of this? Lloyd certainly thinks so, referring to the need for the ISSB to identify partners in the quest to build new capacities.
“There is much to do with regard to raising awareness and getting people involved in the process,” Lloyd explains. “ICAEW simply acting as a strong advocate for the importance of the global baseline could make a big difference. And then, of course, there is education and training. Preparers will require a new mindset. They will need to develop new skills to help them put the standards into practice and learn to apply general professional skills in this new context, while users will need help understanding how sustainability is relevant to enterprise value.”

As a long-term advocate of high-quality, widely applied global reporting standards, we will do all we can to support Lloyd and her IFRS Foundation colleagues in their endeavours.