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Sustainability reporting is growing so rapidly that companies, investors, and regulators are grappling to understand numerous standards and frameworks all while new ones are being proposed. For the most part, country developments have taken place in parallel to each other, with hardly any effort to align or consult between jurisdictions. The result is lack of coherence and comparability due to a lot of variance between regulatory standards.
On 27 April 2022, the International Sustainability Standards Board (ISSB) launched a working group for the purpose of bridging differences between ISSB’s exposure drafts and the sustainability reporting standards of various local jurisdictions. As the International Financial Reporting Standards (IFRS) drafts are expected to have major influence on more than 140 member jurisdictions, ISSB is seeking input during the public consultation phase. The working group is represented by experts from the world’s largest economies - US, China, UK, EU, and Japan - to get their feedback on compatibility with local standards.
The initiative is a commendable effort as global markets will benefit from further integration of ESG standards. Closer alignment will enable companies to compare themselves with peers using a common global language on sustainability, including the standardisation of measurement approaches. Companies in China, where there is no authoritative carbon disclosure guidelines, may have to revise their approach if changes are made towards better alignment with European standards, for example, where there is stronger regulatory commitment towards climate reporting especially the TCFD recommendations. At the same time, companies in the US may face yet more pressure for disclosures as American law plays catch up. A good guess would be adoption by the ISSB of ESG criteria most commonly in use by other countries. Already, there is a knock-on effect in several countries towards TCFD disclosures while China has already released their own draft carbon disclosure standards in 2021 with an openness to explore commonly accepted standards.
In short, companies should prepare to familiarise themselves with frameworks not previously practised. With an aligned global baseline, competitive advantage arising from lower ESG standards will be minimised, and they may find investors asking for information beyond the scope of established in-country laws. The investing community will have an easier time making decisions based on ESG performance, creating an overall boost to sustainable investing and responsible finance. Capital flows will find a clearer and more efficient path to ESG funds.
The working group is a stepping stone to larger scale cooperation between more jurisdictions. The IFRS Standards are intended to be a global baseline for ESG disclosures, and dialogue facilitates relevance for the stakeholders involved.
Hope is pinned on the ISSB as the leading effort to coordinate harmonisation between ESG disclosure standards. We are seeing the balance of differences move towards an equilibrium that will bring greater clarity for all.