Sustainability disclosure: no longer about the why, it’s about the how
As Emmanuel Faber, Chair of the IFRS Foundation’s new International Sustainability Standards Board, stated in a recent interview – the pandemic has taught us all lessons. Our capital market model was put to the test, and as a result you’d be hard pressed to find a CEO of any major organization that isn’t acutely aware of the impact social and environmental issues can have on the immediate and longer-term prospects for their business.
This recognition is a marked shift in perspective and can be seen on multiple fronts. CFOs and finance ministers turned up to last year’s COP26 meetings in numbers never seen before. Adoption of sustainability disclosure standards continues apace, with SASB Standards adoption up 326% in Europe last year, and businesses in 22 of the EU27 are now opting to publish integrated reports to communicate holistically on value creation. Each of these observations can be seen as an increasing recognition of the interconnectedness of finance and sustainability.
This shift has also led the global business and investor community to support the IFRS Foundation’s establishment of the International Sustainability Standards Board to drive a global baseline for sustainability disclosure.
The European Commission has embarked on its bold plans to develop EU sustainability reporting standards, providing global leadership and – we believe – an opportunity to build on the IFRS Foundation’s global baseline, which could help catalyse essential headway at an international level.
This new drive is to be applauded. But securing widespread support to address sustainability risks is only half the battle. Businesses globally are finding they need to build their expertise in the field and develop new processes, and quickly.
Those responsible for setting the standards will also need to move quickly to meet new demand. Sustainability issues are not stagnant, they evolve continuously and as a result standard setting must find the balance between robust development, grounded in rigorous due process while moving nimbly to remain effective.
We’ve learned a lot about how to find this balance over the last ten years of setting SASB Standards. When SASB Standards were launched in late 2018 it was the culmination of six years of extensive research and market engagement.
And yet, much like building a home or planting a garden, the work is never ‘done’. Since 2018, we have been focused on how to improve the SASB Standards – with our first set of revised SASB Standards focused on three industries (Metals & Mining, Coal Operations, and Asset Management & Custody Activities) published last month.
Sustainability information must also meet the needs of different users. For example, industry-specific disclosure is essential for investors because not all sustainability issues matter equally to each industry, and the same sustainability issue can manifest differently across industries.
For obvious reasons, this makes the process of maintaining standards more complex. And yet, this added complexity is worth it to achieve effective disclosure. Let me offer an example.
In 2019, a tailings storage facility in Brumadinho, Brazil collapsed killing over 250 individuals and causing extensive environmental damage. In response, investors came together to form the Investor Mining and Tailings Safety Initiative and directly asked extractives companies to be more transparent in their management of tailing facilities. The International Council on Metals and Mining also partnered with the UN Environment Program and the Principles for Responsible Investment to convene the Global Tailing Review, which developed the Global Industry Standard on Tailings Management. The SASB Standards Board improved coverage of this issue in the two industries where tailings facilities are commonly used. Tailings storage facilities management is now a separate disclosure topic, addressing not only an expanded inventory of tailings storage facilities, but also systems and failure-prevention strategies as well as emergency preparedness and response plans.
To most effectively move the needle on sustainability disclosure, standards need to incorporate sector-specific information. This should not be to the detriment of sector-agnostic disclosure, but as a natural complement.
Both the IFRS Foundation and the European Commission have recognized the importance of sector-specific disclosure. SASB Standards will provide the starting point for industry-specific requirements under the IFRS Foundation’s International Sustainability Standards Board.
And the Value Reporting Foundation is sharing its significant technical resources with the EFRAG Project Task Force, as well as learnings and insights developed over the last ten years, to help inform development of the sector-specific elements of the European standards by mid-2023.
Aiming for alignment, EFRAG has already done a detailed exercise of mapping business activities under the EU’s industry standard classification system to the 77 industries covered by SASB Standards.
As we embark on 2022, I am heartened by the significant shift in the conversation. It’s no longer about why we need to engage in sustainability issues, it’s about how. Importantly, how different jurisdictions can work together to accelerate collective progress is a welcome cornerstone of this conversation.
Whilst this year may prove to be the busiest and most challenging to date, we stand ready to use our knowledge and insights so that together we can move quickly towards achieving sustainability goals.
Our learnings from the pandemic teach us we can’t afford to do otherwise.