Nearly every company today understands that sustainability must be made core to its strategy and capital-allocation process, but many are often confused by how best to report on environment, social, and governance (ESG) progress in a way that will be credible to shareholders and other stakeholders. What is needed is a uniform set of standards for measurement and reporting—just as we have for financial performance. Imagine a world where each company had to decide for itself how to measure, say, revenues or depreciate its assets. Or to pick from three or four alternative ways of doing so suggested by nongovernmental organizations. That is the situation companies have been living in when it comes to ESG. But there is hope on the horizon.
The world of sustainability reporting is a plethora of names and frameworks. Just to list a few of the more well-known ones: the Climate Disclosure Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council, the Sustainability Accounting Standards Board, and the Task Force on Climate-Related Financial Disclosures.
The good news is that a forerunner has emerged that promises to offer a single source of truth of ESG reporting. It is called the International Sustainability Standards Board (ISSB). The ISSB will do for sustainability reporting what the International Accounting Standards Board does for financial reporting—develop standards for companies to report their performance to investors. Both will be under the International Financial Reporting Standards Foundation.
Created in November at the COP 26 summit, the ISSB will provide a global baseline for high-quality sustainability reporting that will support the work being done in the US by the Securities and Exchange Commission (SEC) and the EU’s Corporate Sustainability Reporting Directive (CSRD). The ISSB is focused on “single materiality,” or the ESG information that drives valuation and matters to investors. This is also the focus of the SEC, so the mandates are consistent. In contrast, the CSRD has a broader “double materiality” mandate, which means it will cover information of interest to stakeholders even if it is not of interest to investors. Linking the two is the concept of “dynamic materiality”; ESG issues that investors don’t care about today can become ones they care about in the future. The most striking current example is climate change.
The ideal outcome is that the ISSB becomes a global standard that integrates the work of all previous standards and frameworks focused on investor needs. Ideally, the SEC and EU can use its standards. The EU can then top up these standards with those covering double materiality. As dynamic materiality makes these relevant to investors, the ISSB can then take over responsibility for the standard setting process.