From convergence to consolidation

ISSB establishes working group to enhance compatibility between global baseline and jurisdictional initiatives

The IFRS Foundation’s International Sustainability Standards Board (ISSB) is creating a working group or advisory body – the Sustainability Standards Advisory Forum – to facilitate dialogue with an input from various jurisdictions as part of it outreach programme, especially in the context of the ongoing consultation of its IFRS Sustainability Disclosure Standards exposure drafts. Members of the working group are the Chinese Ministry of Finance, the European Commission, the European Financial Reporting Advisory Group (EFRAG), the Japanese Financial Services Authority, the Sustainability Standards Board of Japan Preparation Committee, the United Kingdom Financial Conduct Authority and the US Securities and Exchange Commission. This is by far the most significant announcement in the corporate sustainability reporting space (…this week). Because this is about dialogue and ultimately alignment between the two main disclosure standards emerging (ISSB and EFRAG) and between disclosure standards and regulations (especially the SEC). It will be fascinating to watch how this consolidation unfolds. Expect it to happen fast.

On a related note, the China Securities Regulatory Commission is apparently encouraging companies to voluntarily disclose more ESG-related information and is already considering adoption of the ISSB’s IFRS Sustainability Disclosure Standards.

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EFRAG launches a public consultation on the Draft ESRS EDs

The European Financial Reporting Advisory Group (EFRAG) has officially launched the public consultation on the European Sustainability Reporting Standards (ESRS) Exposure Drafts (EDs). The consultation period will run until 8 August 2022. Like everything else the European Commission does, it’s thorough, complete, and… a little bit complicated. This is an opportunity for your voice to be heard, including – and in these circles, especially – if you support the standards and their objectives.

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Public consultation on the first set of Draft ESRS

FCA finalises proposals to boost disclosure of diversity on listed company boards and executive committees

The UK’s Financial Conduct Authority has issued new regulations mandating all UK-listed companies (not just UK-domiciled) to issue a statement that they have met specific board

diversity targets on a ‘comply or explain’ basis and to produce data – in standardized table format - on the sex or gender identity and ethnic diversity of their board, senior board positions, and executive management. Specific targets are prescribed, including at least 40% of the Board to be women. In-scope companies are required to make these disclosures in their annual reports for financial years starting on or after 1 April 2022 – which for most companies means in 2024 for the 2023 fiscal period. This is yet more evidence of the regulatory push for sustainability-related corporate disclosures. It will be interesting to see how jurisdictional regulations adapt to the upcoming standards currently under development (ISSB and EFRAG). Also noteworthy is that regulation trumps materiality; in other words, on mandatory disclosures, companies no longer need to wonder or assess whether the issue is material to them. It just is.

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Read PS22/3

SEC Chair remarks – “Building Upon a Long Tradition”

In a speech delivered a few weeks ago during a Ceres investor conference, the Chair of the US Securities and Exchange Commission (SEC) Gary Gensler explained in very plain language the history of events leading up to the new proposed climate-related disclosure regulation, the purpose of this regulation, and a very clear, common-sense summary of what it contains. I recommend reading it to anyone seeking to understand what it’s about. The proposed regulation is currently??open for public comment until May 20. Once again, this is an opportunity for your voice to be heard, including – and in these circles, especially – if you support the regulation and its objectives.

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SEC Charges Brazilian Mining Company with Misleading Investors about Safety Prior to Deadly Dam Collapse

Speaking of the US Securities and Exchange Commission, last week it charged Vale S.A., a publicly traded Brazilian mining company, with making false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam. That tragedy, in which 270 people lost their lives, immeasurable environmental and social harm was caused, and which led to a loss of more than $4 billion in Vale’s market capitalization, came to epitomize corporate sustainability-related crises – and the capacity for global investor mobilization. ?But this wasn’t just an unfortunate accident. The SEC investigation reveals that the company manipulated dam safety audits, knowing that its tailings dam did not meet international safety standards. But this wasn’t just about fraudulent behaviour. The SEC investigation claims that the company knowingly misled investors and other stakeholders through its environmental, social, and governance (ESG) disclosures. As a result, the SEC is charging Vale with violating antifraud and reporting provisions of the federal securities laws and seeks injunctive relief, disgorgement plus prejudgment interest, and civil penalties. This is apparently the first case brought by the SEC’s Climate and ESG Task Force in the Division of Enforcement, which has a mandate to identify material gaps or misstatements in issuers’ ESG disclosures. We should not underestimate the significance of this announcement, and of the US securities regulator’s demonstration of “walking the talk”. It is a reminder that regulations matter because they are enforceable. They help to crystalize the materiality of issues and put a dollar value on the impact on the company’s financial performance and risk profile. They are a very powerful driver – or deterrent – in shaping the companies or corporate behaviour we want to have. This case is also noteworthy because the lines between fraud, financial fraud, and ESG issues are quite blurred… perhaps offering a good illustration of the connection between sustainability-related management, financial performance, and enterprise value creation.

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Value Balancing Alliance and Harvard Business School Impact-Weighted Accounts collaboration

The Value Balancing Alliance is an alliance of multinational companies seeking to measure business’s contribution to the environment and society by translating these impacts into financial data. The Impact-Weighted Accounts Project is a Harvard-led initiative to capture external [environmental and social] impacts in corporate accounting statements. The two have announced a collaboration to develop a consistent impact accounting methodology. We could not agree more with the release’s statement that “the time and ecosystem are now ripe for more intensive collaboration”, in reference to the G7 Impact Taskforce calling for mandatory accounting – and reporting – for impact. We are indeed hearing more and more about impact materiality (in the GRI), double materiality (in the European Union’s Corporate Sustainability Reporting Directive and EFRAG standards), and impacts and dependencies (in the IFRS Sustainability Disclosure Standards and the Taskforce on Nature-related Financial Disclosures). And just like convergence on sustainability disclosure standards had become necessary and is currently happening, so too is there a need for a common understanding of how to measure impact. It’s direction of travel for future corporate disclosures.

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