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  • ESG Pulse

    Monitoring the heartbeat of ESG standards
    • Marcus Aurelius
      The IFRS Foundation have announced today that they will form a working group to accelerate convergence in global sustainability reporting standards focused on enterprise value. The first meeting of the working group is expected to take place in April 2021.
      The working group will be chaired by the IFRS Foundation and include participation by:
      ·       International Accounting Standards Board (IASB)
      ·       Task Force on Climate-related Financial Disclosures (TCFD)
      ·       The Value Reporting Foundation (representing a soon to be merged IIRC and SASB)
      ·       Climate Disclosure Standards Board (CDSB)
      ·       the World Economic Forum (WEF)
      ·       IOSCO will participate in the group as an observer,
      The news release also notes that while the Global Reporting Initiative (GRI) will not be part of the working group they will be engaged with, along with the Carbon Disclosure Project (CDP).
      The working group will provide technical recommendations, including further development of the prototype built on the TCFD recommendations, as a potential basis for the new Sustainability Standards Board (SSB) to build on existing initiatives and develop standards for climate-related reporting and other sustainability topics.
      The group will also review how technical expertise and content might potentially be transitioned to the SSB under the IFRS Foundation’s governance structure. The aim being to consolidate and reduce fragmentation in sustainability reporting standards.
      As previously noted the IFRS Foundation envisages that sustainability reporting standards issued by the SSB will provide a global sustainability reporting baseline that would allow for greater comparability and consistency of application of the standards, while also providing flexibility for coordination on additional jurisdictional and multi-stakeholder reporting requirements (a 'building blocks' approach).
      With this in mind the IFRS Trustees will commence work with IOSCO and relevant organisations to explore the establishment of a multi-stakeholder expert consultative committee within the IFRS Foundation structure. The consultative committee would be tasked with formalising and streamlining the SSB’s engagement with the relevant global stakeholders involved in sustainability reporting.
      Finally the IFRS Foundation have announced that Clara Barby (CEO of the Impact Management Project) will take partial leave from the Impact Management Project (IMP) to be the project lead for the IFRS Foundation’s sustainability project.

    • Marcus Aurelius
      Over in the calendar section you can find a selection of upcoming events from around the web.
      On Monday the TCDF are hosting a seminar on Water-related financial reporting which examines CDSB's application guidance for water-related financial disclosure. In addition to exploring the practicalities of water-related financial disclosure with case studies the TCFD are promising a prize to the winner of their quiz!
      Also on Monday a particularly relevant session (for those of us following latest development in the US) from the PRI - Responsible Investment Under President Biden: What Investors Need to Know. The webinar will provide an update on the first two months of the Biden administration, with an overview of the administration’s priorities and actions, policy developments at financial regulators and Congress, and what to expect on the horizon. 
      If you are aware of any other key events we are missing please contact us at marcus@esggeek.com.

    • Marcus Aurelius
      In an earlier post Hurdles to overcome on path to an IFRS Sustainability Board we noted that:
      “Six months ago, no US financial regulator would risk the wrath of Trump by talking about climate change.  Today, the Biden administration is determined to provide global leadership in climate policy.  What does that mean for sustainability reporting? Will the US get behind an international, multilateral solution... or will it see sustainability reporting as something that the US needs to have direct control over?”
      And boy, what a busy few weeks it has been for the SEC and Climate Change. There have been two press releases in the last six weeks.
      In February they appointed Satyam Khanna as Senior Policy Advisor for Climate and ESG to advise the agency on environmental, social, and governance matters and advance related new initiatives across its offices and divisions. Then on the 4th of March the SEC announced it was setting up an Enforcement Task Force Focused on Climate and ESG Issues. The initial focus of the task force is to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules. Also, the task force will analyse disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.
      However the real action with regard to Sustainability Standards at the SEC is happening elsewhere.
      On the 11th of March, John Coates Acting Director, Division of Corporation Finance at the SEC made a number of observations relevant to ESG in a public statement titled “ESG Disclosure – Keeping Pace with Developments Affecting Investors, Public Companies and the Capital Markets”. He stated his belief that “The SEC should help lead the creation of an effective ESG disclosure system so companies can provide investors with information they need in a cost effective manner.” However he then turns his attention to the IFRS Sustainability Standards initiative (emphasis added):
      On the issue of global comparability, in the first instance, arguments in favor of a single global ESG reporting framework are persuasive. ESG issues are global issues. ESG problems are global problems that need global solutions for our global markets. It would be unhelpful for multiple standards to apply to the same risks faced by the same companies that happen to raise capital or operate in multiple markets. In this regard, the work of the IFRS Foundation to establish a sustainability standards board appears promising.
      He does note that a global (IFRS based) approach has issues including “Funding, governance and public accountability”. And argues that the SEC have an important role to play
      Those involved should be accountable to relevant constituencies, including investors and companies. … the SEC can and should play a leading role in the development of a baseline global framework that each jurisdiction can build upon to address its individual needs.
      Following on from this we have a public statement from the acting chair of the SEC, Allison Herren Lee, titled "Public Input Welcomed on Climate Change Disclosures” . In it she states that she is “asking the staff to evaluate [SEC] disclosure rules with an eye toward facilitating the disclosure of consistent, comparable, and reliable information on climate change”. To facilitate this she has asked for input on 15 questions from stakeholders (with a 90-day deadline). The questions are designed to assess “the materiality of climate-related disclosures, and the costs and benefits of different regulatory approaches to climate disclosure.”
      From a global sustainability standards perspective, it is interesting to note the IFRS Foundation initiative is never explicitly mentioned, though the TCFD, SASB and CDSB all feature. This isn’t to say that we think the IFRS initiative is being ignored, far from it, rather this appears to be an opportunity to test out support for engaging with the IFRS Foundation without looking like the SEC is driving in this direction. Perhaps it is better to have the proposal emerge from the feedback, allowing the SEC to say this is what the people want.
      Two questions clearly are looking for feedback relevant to the IFRS Sustainability Standards initiative. First, question 6 asks (in part, emphasis added):
      Should the Commission itself carry out these tasks, or should it adopt or identify criteria for identifying other organization(s) to do so? If the latter, what organization(s) should be responsible for doing so, and what role should the Commission play in governance or funding? Should the Commission designate a climate or ESG disclosure standard setter? If so, what should the characteristics of such a standard setter be? Is there an existing climate disclosure standard setter that the Commission should consider?
      A question that begs the question, should we look at the IFRS Foundation? This is particularly salient when you consider that the mentioned standard setters have already thrown their weight behind the IFRS initiative. Presumably the other global organisation is the GRI which seems to be positioning itself as the alternative to the IFRS initiative if it doesn’t widen its remit quickly.
      We also have question 9 (in part, emphasis added):
      What are the advantages and disadvantages of developing a single set of global standards applicable to companies around the world, including registrants under the Commission’s rules, versus multiple standard setters and standards? If there were to be a single standard setter and set of standards, which one should it be? What are the advantages and disadvantages of establishing a minimum global set of standards as a baseline that individual jurisdictions could build on versus a comprehensive set of standards? … What should be the interaction between any global standard and Commission requirements?
      Again this seems to beg the question, what are the advantages and disadvantages of embracing the IFRS Initiative, given that it has already indicated that it will take a “building blocks approach” that mirrors the approach outlined “establishing a minimum global set of standards as a baseline that individual jurisdictions could build”.

    • Marcus Aurelius
      Over in the calendar section you can find a selection of upcoming events from around the web.
      This coming week everything is happening on Wednesday!
      Responsible investor are hosting a webinar titled "ESG Investor Insights series - A Teach-in with investors: Investor Engagement". The session will address the questions: What does investor engagement shareholder activism and stewardship actually mean? What is the business case for doing so, and what outcomes are investors really seeking? How should companies respond?
      We also have the PRI who peering into their crystal ball to address "The Inevitable Policy Response 2021: Forecast Policies". The event will include an overview of 'The Inevitable Policy Response' a project undertaken by the PRI and will be followed by a deeper examination of the forecast policies and implications for investors.
      If you are aware of any other key events we are missing please contact us at marcus@esggeek.com.

    • Marcus Aurelius
      On Monday the IFRS Trustees announced the strategic direction of an International Sustainability Standards Board. As we discussed the four key principles they announced were: 
      Investor focus Climate focus Build on existing frameworks Building blocks approach The announcement has been widely reported and today we thought we would briefly look at some key responses.
      We can start with a tweet from Mark Carney, former Governor of the Bank of England and now United Nations special envoy for climate action and finance:
      "I welcome @IFRSFoundation's announcement on int'l sustainability reporting standards that are built on the @FSB_TCFD framework. This is a vital step towards globally consistent & comparable climate disclosures in the #racetozero. What gets measured gets managed."
      Of the large sustainability standard setters only the GRI and CDSB appear to have commented. 
      The CDSB are supportive, with Ravi Abeywardana, CDSB Technical Director saying 
      “The trajectory outlined in today’s IFRS Statement ... follows a familiar path to the evolution of CDSB since it's inception in 2007, which started with financially material climate risk reporting and then moved to cover environmental and social issues more recently and as such with our close alignment to both IFRS and TCFD are well placed to support the Trustees in developing a globally consistent and comparable baseline for reporting sustainability information”.
      The Global Reporting Initiative (GRI) state that the IFRS proposals on corporate sustainability are a step in right direction but clearly believe there are short comings with the proposal. The foci on climate and investors are too narrow for the GRI. With regards to Investors Eric Hespenheide, GRI Chairman is quoted as saying
      "Recognizing investors’ needs for reporting that identifies the effects on value creation linked to social and environmental issues is a step forward. However, companies need to be accountable to a multiplicity of stakeholders... The case for multi-stakeholder reporting, which applies the principle of double materiality, is clear."
      As for climate he notes 
      "the limited scope as outlined will not address the wide-ranging impacts that companies have on the planet. We urge the IFRS to set their ambition commensurate with the needs to support companies in articulating the impacts of the full range of sustainability issues on their financial health; including, for example, social issues, tax and biodiversity."
      The GRI clearly see themselves as continuing to play an important role in this space going forward.
      Many papers and magazines have reported the IFRS Foundation press release as presented. Though both the Financial Times in an article titled "Signs ESG reporting slush is melting away" and Accounting Today, in an article titled "IFRS Foundation moves ahead on international sustainability standards board", quote Larry Bradley, KPMG’s global head of audit. In the Accounting Today article he says 
      "I’m really pleased about the IFRS announcement... Frankly, I think that’s what’s really needed. It looks like they’re headed toward an announcement in November, and all the steps are moving in the right direction. I think the IFRS Foundation is uniquely and appropriately positioned to take on this task.”
      He believes that the IFRS Foundation is well placed to simplify and consolidate the existing standards that have been generated by a range of different bodies.
      Meanwhile Professor Carol Adams in a blog post titled "EU v IFRS: Fundamentally different approaches to sustainability reporting" compares the IFRS Foundations' current statements to the European Financial Reporting Advisory Group (EFRAG) proposals for EU sustainability reporting standard-setting. Her conclusion is that
      "The IFRS Foundation approach is not sustainability reporting. It will not address sustainable development and will (according to research) almost certainly hinder it."

    • Marcus Aurelius
      The IFRS Trustees have announced the strategic direction of an International Sustainability Standards Board.
      Investor focus for enterprise value: the new board would focus on information that is material to the decisions of investors, lenders and other creditors. Climate focus initially: due to the urgent need for better information about climate-related matters, the new board would initially focus its efforts on climate-related reporting, while also working towards meeting the information needs of investors on other ESG (environmental, social and governance) matters. Build on existing frameworks: the new board would build upon the well-established work of the Financial Stability Board’s Task Force on Climate related Financial Disclosures (TCFD), as well as work by the alliance of leading standard-setters in sustainability reporting focused on enterprise value. Building blocks approach: by working with standard-setters from key jurisdictions, standards issued by the new board would provide a globally consistent and comparable sustainability reporting baseline, while also providing flexibility for coordination on reporting requirements that capture wider sustainability impacts. The Trustees are expected to announce final details about a new board in advance of the November 2021 United Nations COP26 conference.
      We can also expect to see more formal discussions with key organisations that have been developing sustainability frameworks in the near future it seems, as the IFRS Foundation will initiate a process of structured engagement with the relevant organisations.

    • Marcus Aurelius
      Over in the calendar section you can find a selection of upcoming events from around the web.
      This coming week everything is happening on Thursday!
      The PRI have two events, "Corporate Governance in China: What Investors Need to Know" and "Setting the Ambition: What Does Net Zero Mean for Investors?". For us the second of these will be particularly interesting as more companies look towards net zero they will need to think about how this impacts on their financial statements.
      The other event is the second in a series "How to account for climate in financial reporting" which will focus on IAS 36 Impairment of Assets; and IAS 16 Property, Plant & Equipment.
      If you are aware of any other key events we are missing please contact us at marcus@esggeek.com.

    • Marcus Aurelius
      Professor Robert Eccles from Oxford University has written an interesting piece for Forbes suggesting that “The U.S. Struggle Over Climate-Change Disclosure Is Coming To A (Hopefully Successful) Head”. In the article he observes that while the previous US administration was not as supportive of Climate Change initiatives, the Biden administration is giving them high priority.
      He looks at the recent discussions of the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets of the House Financial Services Committee when discussing the “Climate Risk Disclosure Act of 2021”. A number of Republicans spoke against the bill.
      “Rep. Anthony Gonzalez (R-Ohio) [argued] that the motivation behind mandating sustainability-related disclosures is to solve political or moral problems and not to protect investors.” And “Bill Huizenga (R-Mich.) [claimed] that expanded disclosure requirements would add regulatory burdens for publicly listed companies and discourage private companies from going public.”
      As Prof. Eccles notes these arguments seem out of touch given the increasing demands from investors for enhanced disclosures on climate risks and companies increasingly providing voluntary disclosures.
      Recent announcements from the SEC certainly appear to support increased standard setting around climate change. The question is do we expect them to support the IFRS Foundation’s initiative to establish a Sustainability Standards Board (SSB). Or perhaps more importantly, to accept the standards they produce.
      Prof. Eccles appears optimistic concluding the article with:
      “I am also optimistic about U.S. support—not only from the SEC, but also U.S.-based investors and companies. While disclosure alone is not a silver bullet—government policies, a price-appropriate tax on carbon emissions, and innovation are also essential—it is an important step for enabling the private sector to do what it can to adapt to and mitigate the effects of climate change.”

    • Marcus Aurelius
      Over in the calendar section you can find a selection of upcoming events from around the web.
      Bit of a quieter week ahead of us (unless we missed something significant, and if so please let us know).
      However that doesn't mean it isn't an important week. The IFRS Trustees are meeting from the 2nd to the 3th, and they will be continuing their analysis of the responses received to their Consultation Paper on Sustainability Reporting. Though the session will not be public it will be interesting to see what they have to say afterwards.
      If you are aware of any other key events we are missing please contact us at marcus@esggeek.com.

    • Marcus Aurelius
      IOSCO, the international organisation of securities regulators, has thrown its considerable weight behind plans for the IFRS Foundation to establish a new board to develop sustainability reporting standards, alongside the IASB (which is responsible for developing IFRS).
      The IOSCO Board met on 24 Feb, and following that meeting issued a press statement that;
      Committed to work with the IFRS Foundation Trustees in developing a new board that develops standards that are capable of market acceptance Encouraged the new board to build upon existing sustainability-related developments - notably the work of the TCFD, and To apply a 'building blocks' approach, whereby the new board develops a baseline of sustainability standards that others (at an international or jurisdicitonal level) can build upon. Among those welcoming the statement, SEC Acting Chair Allison Lee said 'I support today's announcement from IOSCO regarding the creation of the SSB.  It will be helpful in developing a consistent set of sustainability related reporting standards.  It is critical that the SSB have a strong governance foundation and adopt a pragmatic approach to developing standards on climate and other ESG factors.  I have directed the SEC staff to fully engage with IOSCO on sustainable finance and disclosure issues, especially in its work to facilitate the proposal to establish an SSB'

    • Marcus Aurelius
      In an article titled "The Top 6 Barriers to Better ESG Data (and What To Do About Them)" Tim Mohin, chief sustainability officer for Persefoni AI and former chief executive of the Global Reporting Initiative, outlines the key problems he sees at present. The six issues he identifies are:
      Sustainability is not just an investment Immaturity of accounting Inconsistent standards and lack of assurance Lack of regulation – for now Lack of comparability Lack of technology In the article he notes that many of these problems are being solved. Calling out the IFRS Foundation's moves towards an International Sustainability Standards Board as one possible solution to the inconsistent standards issue.
      But his key point is 
      "2021 signals a tipping point where the barriers to better ESG data will be overcome. With regulators on both sides of the Atlantic and in China driving reporting mandates, unprecedented levels of money flowing into ESG assets, and pressure from mainstream investors, this market will rapidly mature.  And not a moment too soon."

    • Marcus Aurelius
      In an article published in Accounting Today titled “Accountants can save the planet while helping businesses flourish” Professor Richard Barker of Oxford University states that the IFRS Foundation have the relationships, authority and expertise to take on the creation of a Sustainability Standards Board. He argues this global approach is necessary because:
      The voluntary frameworks currently adopted by some corporations are insufficient as they do not lend themselves to complete, comparable disclosures. Regional solutions, such as those floated by the European Union, while well intentioned, are also a non-starter. Business in the 21st century is global, and different and potentially conflicting standards between regions would hamper our efforts to tackle this crisis.
      Interestingly Prof Barker goes on to argue for a single materiality approach.
      To be viable, these reporting standards should be focused solely on sustainability-related financial disclosure tailored to the investor’s needs. They must relate to the economic value creation of the business.
      He says that much like financial accounting, though focussed on investors needs, all stakeholders would benefit from having access to this information.

    • Marcus Aurelius
      Over in the calendar section you can find a selection of upcoming events from around the web.
      There are a number of interesting events, two of particular note are mentioned below.
      On Wednesday the Japan Climate Leaders Partnership (JCLP) are hosting a webinar on "Directors’ duties and climate change in Japan". The session will launch of a new report on Directors’ Duties Regarding Climate Change in Japan.. 
      On Friday KPMG are hosting a webinar on "ESG for CFOs: What you need to know". The webinar will explore why finance is uniquely positioned to help organizations identify, report on, and drive Environmental, Social, and Governance (ESG) commitments.
      During this webcast, KPMG LLP executives will discuss:
      The role that finance plays in driving awareness of ESG data and its financial value How to effectively measure sustainability to help demonstrate your company’s commitment to ESG The key benefits of reporting on your organization’s reputation for ESG sustainability The common challenges organizations face with reporting on and measuring ESG value across all three components. If you are aware of any other key events we are missing please contact us at marcus@esggeek.com.

    • Marcus Aurelius
      We noted last week the importance of the International Organization of Securities Commissions’ (IOSCO) support for the IFRS Foundation’s push on sustainability standards. At almost the same time as we published the article, Ashley Alder, Chair of the IOSCO Board, was addressing the Climate Risk and Green Finance Regulatory Reform summit. In his speech, published today, he specifically called out the IFRS Foundation proposal to establish a global sustainability standards board. Noting the proven track record of the IFRS in standard setting he stated that
      The potential outcome is a very promising pathway to global convergence, with the ultimate aim of laying a foundation for independent assurance of climate reporting modelled on traditional financial audits.”
      He also pointed out that IOSCO was ideally placed to assist the IFRS in its efforts to establish sustainability standards, indicating that IOSCO views this as
      a very positive development which addresses head-on the problem of ‘noise’ resulting from a multiplicity of different private sector standards addressing the same market.
      This contrasts with concerns he raised about current standard setting efforts that he suggested have lead to disclosures that are “inconsistent and at times misleading”:
      Unfortunately, the sustainability information which is now being disclosed is often wildly inconsistent: clear definitions have not yet been agreed at a global level, and there are no standard methodologies. This can lead to cherry-picking and shopping around for reporting standards or ratings so that sustainability disclosures look as good as possible. This makes greenwashing easier, which then raises questions about the credibility of the whole climate disclosure effort.

    • Marcus Aurelius
      The EU is currently undertaking a number of initiatives around climate action and environmental policy. They have observed that the “transition to a sustainable economy will entail significant investment efforts across all sectors and will require to manage and integrate climate and environmental risks into our financial system”.
      In order to assist with the transition the “European Green Deal” announced a Renewed Sustainable Finance Strategy to help channel investment into sustainable projects and activities. The EU plans to have a Renewed Sustainable Finance Strategy ready for adoption in the first half of 2021.
      As part of this project the EU has undertaken a range of stakeholder consultation to help it develop policy that will (among other things):
      “Strengthen the foundations for sustainable finance by creating an enabling framework to shift the focus of financial and non-financial companies to sustainability and long-term development.” and “Fully manage and integrate climate and environmental risks into financial institutions and the financial system as a whole.”
      The EU have released a summary of the feedback received, and the documents is a comprehensive 82 pages long, which we don’t plan on summarising here. But what we think is particularly interesting, given the IFRS Foundations’ current interest in Sustainability Standards, is the discussion around whether or not current accounting standards support sustainable finance.
      The report notes that “of those respondents who had an opinion” the majority felt that “existing financial accounting rules … may hamper recognition and measurement of long-term sustainability risks.” Specific areas identified included:
      Impairment and depreciation rules: Respondents indicated that IFRS depreciation rules do not fully (or at least explicitly) reflect climate risks. Some recommended that companies should disclose the (key) assumptions used for impairment and depreciation charges and align these with the Paris Climate agreement. Provisioning: Several respondents pointed at the importance of adequate provisioning for climate change impact, with some noting that that IFRS rules on provisioning for future risks are too strict to allow sufficient
      provisions for things like “repairing”. Contingent liabilities: Most stakeholders highlighted the need for additional emphasis on significant climate-related contingent liabilities. The report notes that some stakeholders felt that a short-term focus on cash flow generation in the Standards negate longer term sustainability issues and make it unlikely accounting can capture all sustainability risks in financial statements. Though some respondents considered that existing IFRS can adequately capture the financial implications of sustainability risks but more guidance is needed on this.

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