By Tamara O’Brien, TMIL’s roving reporter
Today’s webinar was very much on my mind earlier this week, as I surveyed the serried ranks of toothbrush options in Sainsbury’s. Why don’t they just make a standard toothbrush, I mused, with different coloured clips to denote ownership, that a person keeps ‘for life’? That’d save container loads of plastic, wouldn’t it?
Back home, I found out that the coloured part of a standard toothbrush is produced through a process called overmoulding. It’s used on power tools and a million other things to enhance grip, reduce vibration, prevent corrosion etc. Since most people don’t need extra grip to wield their toothbrush, the overmoulding is purely there to add colour. So, an unnecessary use of resources and energy. The really bad news? Overmoulding uses a type of plastic that can’t be recycled. And given that it’s inseparable from the recyclable plastic it’s bonded to, it sends the whole object straight to landfill.
Times that by a trillion [1] and…
Over-manufacturing is one of the many ingenious ways in which we’re killing the planet. With increasing scarcity of resources and all the problems of waste, I’d love to see sustainability standards – or even better, laws – that oblige companies to design and make products with whole-life and repairability considerations built in.
So why, in this age of purpose, sustainability and environmental zeal, might companies not be so keen on product stewardship, as we used to call it? Partly, I guess, because it would require prohibitively expensive retooling. Partly because of ‘consumer choice’ and competitiveness. I’m sure regulation comes into it too. Quite possibly, every division and function of the toothbrush company (sorry to pick on toothbrushes) would have a legitimate argument for keeping things the way they are.
But in the end, it comes down to profitability. And therein lies the challenge at the heart of any discussion of ESG reporting standards.
When is she going to start talking about ISSB…
Which brings me, at last, to today’s webinar topic: the newly formed International Sustainability Standards Board, or ISSB. If there’s anyone reading this who’s never heard of ISSB, it’s an organisation launched at COP26 that will set reporting standards intended to bring about ‘a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets.’
It’s a big deal because for the first time in history it looks like we might achieve a global set of sustainability standards for companies to work and report to, instead of the multiplicity of standards, frameworks, guidelines out there – GRI, TCFD, CDSB, IRF, SASB, SDGs and more. (Please look them up if you want to, it hurts my brain to spell them out!)
We approve. And the ‘toothbrush’ bit?
Here’s where it gets really interesting. The foster parent of the ISSB is the International Financial Reporting Standards (IFRS) Foundation. And on the IFRS’s Who we are page, they address the aforementioned sustainability/profitability issue. The IFRS Foundation is, of course, best known for its financial accounting standards, so it’s expressed in rather dry financial-and-non-financial-reporting language – but the meaning is plain enough:
“Our Standards are developed by our two standard-setting boards, the International Accounting Standards Board (IASB) and the newly created International Sustainability Standards Board (ISSB)… The ISSB sets IFRS Sustainability Disclosure Standards… [which] set out how a company discloses information about sustainability-related factors that may help or hinder a company in creating value.”
“The two boards will work closely to ensure their Standards complement each other to provide investors with transparent and reliable information about a company’s financial position and performance, as well as information about sustainability factors that could create or erode its enterprise value in the short, medium and long term.”
For me this is revolutionary. When companies talk about their value in relation to sustainability, we’re used to seeing words like ‘helping’ and ‘creating’; but ‘hindering’ and ‘eroding’? Never. It’s an astonishing stepping-up of gear, and will surely fuel many a heated debate in the boardroom. I’m looking forward to seeing how these standards work in practice.
And I’m not the only one. Our expert panel today have all helped the drive towards global standards in sustainability, in their own ways.
Following Claire’s introduction, Jonathan Labrey of the Value Reporting Foundation (VRF) was reminded of his time at the International Integrated Reporting Council (IIRC), when companies welcomed the concept of integration to tell a single-source story of truth about themselves, rather than in separate finance/business/environment/society silos.
In the next few months, the VRF will be consolidated within the IFRS Foundation, to help the ISSB hit the ground running. Jonathan gave a bravura narrative performance of how the various international sustainability bodies and standards came together over the last ten years to deliver ISSB. As a complex origin story, it’s up there with The Epic of Gilgamesh and I couldn’t hope to reproduce it; but for those interested in the fascinating, if tortuous, global journey of sustainability standards, please do watch the video.
Jonathan also made a fascinating observation about the pandemic. In 2020, CEOs who’d formerly spent their time travelling the globe abruptly stopped doing so – freeing them to talk with the standards organisations, and among themselves, about the different frameworks they reported against. Thus the impression of there being some kind of competition gave way to the reality of a shared vision, and collaboration in the public interest.
From these discussions, two prototype standards emerged – one on climate-related financial disclosure, and a general sustainability standard – which now form the basis of the first resources being recommended for the ISSB. Critically, Jonathan and the team are determined that the ISSB will retain the collaborative approach developed in 2020.
More inside information: the ISSB will be ESG-focused, with very much a climate-first approach. And when the Board is announced, an ‘exposure draft’ (accountancy term – a document published to solicit public comment on a proposed standard) of the climate standard will follow soon after.
Returning to his theme of collaboration, Jonathan ended on a rather beautiful aphorism: If you want to go fast, go alone. If you want to go far, go together.
Truth takes time – and a little stick-and-carrot
Richard Barker, Professor of Accounting at Oxford’s Saïd Business School, spoke about the relationship between sustainability reporting and financial reporting. His thesis was that we’re used to the notion of ‘truthful, meaningful’ reporting in financial reporting – it’s there in the balance sheet and what the auditors have signed off. Even though, as he pointed out, that by itself tells you remarkably little about a company’s past, current and future financial position, and so the narrative accompanying it is all important for truthfulness – cue silent cheers from Claire and TMIL afficionados!
It’s less obvious what ‘truth’ is in sustainability or ESG reporting. Yes, you’re reporting on performance, but to stakeholders as much as investors – and with this much wider audience, the question of materiality, of what information is relevant in assessing performance, is less obvious. And without a single set of metrics there’s greater emphasis on narrative, which by its nature can’t be standardised. Each company has to explain why its strategies for carbon, water consumption and so on are relevant to its specific business model. ISSB can offer structural guidance, but the quality of disclosure is up to companies themselves.
For Richard, the really good news is that ISSB aims to become the mandatory standard setter. This will help enormously – by establishing a consensus on ‘truth’, rather than having a smorgasbord of standards; and focusing everyone’s minds, including those of the assurance institutions, in a constructive way. Of course, voluntary requirements are relatively easy to produce – mandatory ones, not so much. Impressive work has been done already, especially in reconciling the different approaches of IFRS and SASB relating to carbon, but other areas of sustainability reporting will take time.
The final furlong
Having mentioned the Sustainability Accounting Standards Board, it was fitting to turn finally to SASB’s Founding Chairman, Professor Robert Eccles. Bob observed that all three of them on the panel had been ‘pounding away on this for some time, with slow, slow progress – and then, boom!’
His take on standard-setting: on one level it’s a very technical process, but without objective metrics, inevitably it gets bound up with politics, values and ideology. Globally, it’ll be interesting to see what happens between the three key players, namely:
ISSB
Europe, with its European Financial Reporting Advisory Group (EFRAG), and the EU’s Corporate Sustainability Reporting Directive (CSRD)
The US, which is going through interesting political times. The Republican Party is a big influence on the US financial governing body, the SEC – but unfortunately said party had, in Bob’s words, ‘lost its mind’. He predicts the US will issue only vague and modest proposals in relation to climate change.
In the ISSB consultation process, the global corporate community made it clear that they want sustainability reporting to be on a consistent, comparable basis: and for that reason, Bob thinks ISSB will ultimately be successful. They’re not over the line yet though. So when the exposure drafts come out – for the Carbon Standard, the Climate Standard, and the conceptual framework for ESG in general – everyone with an interest – including all listening to this webinar – should get involved, and support and advocate them.
On a side note, commenting on the interrelationship of ESG and financial information and the second class treatment meted out to non-financial metrics by companies, Bob said that he believed Chief Sustainability Officers or whatever you want to call them should be part of the finance team and report to the CFO. Why distinguish between the two? Why indeed…
When will the exposure drafts be published?
Jonathan explained that that’s the Board’s decision and they’re yet to be appointed – but it’s expected to be around the end of March/early April 2022. Keep ’em peeled.
Questions from the floor ensued, with lively debates about book value and assurance and interoperability. Your humble reporter, being of the view that whereof one cannot speak, thereof one must be silent, will skip this part. However, reporting professionals will find much to chew over in the last 20 minutes of the webinar recording – not least Bob’s immortal line that companies should ‘quit whining’, which greatly amused the assembled throng, not least the companies themselves!
Final words on ISSB
Bob: Support it! (To which Claire added, ‘that means doing something, ie responding to the consultations’,)
Richard: Climate standards will affect you and they’re coming soon. If you haven’t already, start working on what’s material to you now. (For more on determining materiality, see chapter 2 of Trust me, I’m listed.)
Jonathan: In this interim period, continue to use SASB standards – they’re good preparation for what’s coming in the future.
[1] According to the American Dental Association, one billion plastic toothbrushes are thrown away each year in the United States