Over the past decade, trillions of dollars have flown into the so-called sustainability investments that tout environmental, social and governance factors as part of their decision-making. But the practice has long been plagued by a lack of transparent and comparable data across different industries and regions. A major step has been made to improve that.
On Monday, the International Sustainability Standards Board issued its first sets of standards on sustainability-related disclosures for corporations and financial institutions around the globe. The goal, according to the group, is to “improve trust and confidence in company disclosures about sustainability to inform investment decisions.”
“For the first time, the Standards create a common language for disclosing the effect of climate-related risks and opportunities on a company’s prospects,” wrote the ISSB in a Monday press release.
So far, most sustainability-related reporting has been voluntary, and the information, as a result, is selective and fragmented. This has made it challenging for investors to accurately assess companies’ sustainability-related risks, and has led to widespread “greenwashing” concerns from regulators as companies and investment funds claim the benefits of ESG credentials without actual impact.
“High-quality data is necessary to support price discovery and capital formation, and facilitates efficient capital markets,” says Richard Manley and Carine Smith Ihenacho, chair and vice-chair of the ISSB Investor Advisory Group, in a statement, “ISSB Standards will equally support preparers in communicating sustainability information to their investors and other providers of capital.”
The ISSB was established in 2021 by the International Financial Reporting Standards Foundation, following strong market demand from the investing and business communities for a high-quality, comprehensive global baseline of sustainability disclosures. The IFRS accounting standards are required by more than 140 jurisdictions.
The ISSB climate standards, if adopted, would require companies to measure their scope 1, 2, and 3 greenhouse gas emissions; report how much of their assets and business activities are vulnerable to climate transition and physical risks; and disclose the amount of capital expenditure, financing or investment deployed toward climate-related opportunities; among others.
Companies can provide sustainability-related information alongside their financial statements in the same reporting package, according to ISSB, and the new standards could be used in conjunction with any accounting requirements.
To be sure, the new reporting framework won’t be imposed on global corporations automatically. It is up to individual countries to decide whether to require companies in their jurisdictions to apply the standards. Canada, Britain, Japan, Singapore, Nigeria, Chile, Malaysia, Brazil, Egypt, Kenya and South Africa are currently considering adoption, ISSB Chair Emmanuel Faber told Reuters.
The standards are unlikely to be implemented in the U.S. any time soon. The Securities and Exchange Commission has been working on its own rules for climate disclosure, which has met strong opposition from many corporate giants. There is also a rising wave of hostility toward ESG in the country, which many Republican politicians condemn as a form of “wokeism.”
Write to Evie Liu at [email protected]
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