Whatever your take was on COP26, a key takeaway at the intersection of capital markets and climate was the formation of the International Sustainability Standards Board (ISSB). During the initial days in Glasgow, the IFRS Foundation announced the formation of the new board, an organization meant to develop a global baseline of sustainability disclosures for financial markets.
The formation has been widely celebrated in the sustainable finance community — a community that has grown substantially in the past decade, and has swelled in the past year.
So what does the formation of the ISSB mean for the evolution and efficacy of ESG reporting? To answer that, I checked in with those who I thought would know better than most: Jean Rogers, founder of the Sustainability Accounting Standards Board (SASB) and, as of this month, global head of ESG at Blackstone; and Robert Eccles, founding chairman of SASB, professor of management practice at Oxford and a founder of the International Integrated Reporting Council (IIRC).
I found their insights on the ISSB to be unique and invaluable; promising, concerning and exciting alike. I think you’ll find their takes illuminating as well.
The following has been edited for clarity and length.
Grant Harrison: What most excites you about the newly formed ISSB and its ability to shift capital markets and the real economy to one that is clean and just?
Jean Rogers: Consolidation and maturing of the industry is essential. The opportunity to align global markets on an approach to ESG, while allowing jurisdictions to tailor standards to their priorities and point of view. For example, diversity in India is often interpreted as differing abilities rather than skin color. Decarbonization has a different meaning in Malaysia than Canada.
Bob Eccles: Financial accounting standards and reporting requirements have created the deep and liquid capital markets we have today which have generated substantial wealth. But the information shaping these markets is now too narrow and too short-term for the capital markets to contribute to a sustainable society. Resource allocation decisions by companies and investors need to change, and the standards developed by the ISSB will give both the information they need to do so.
Harrison: The IFRS Foundation said it will complete consolidation of the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) by June. Could you share a bit about the unique value that the CDSB and VRF bring to ISSB and its mission?
Rogers: What’s important are the learnings, not the work products, which were developed for different markets and purposes. A debt of gratitude is owed to these first-generation standards setters, who contributed greatly to awareness about the importance of climate change to the financial system, the necessity of integrated thinking in corporate strategy, the materiality of sustainability factors to investors and, most importantly, that corporate sustainability efforts could be measured effectively.
Eccles: I have been hoping for something like this since I wrote an article for the Harvard Business Review in 1991. The consolidation of the CDSB and the VRF into the ISSB means that we won’t be starting with a clean sheet. CDSB and VRF bring valuable intellectual property, great human capital and budget dollars (especially from the VRF). The frameworks and standards developed by both organizations are focused on enterprise value-creation, the remit of the IFRS Foundation for both the IASB and ISSB. Both organizations also bring strong networks of support from both companies and investors. This will be crucial in establishing the credibility and use of the ISSB’s standards.
Harrison: Going back to 2012, the first year after SASB’s launch; imagine you were afforded a view into 2021 to see the ISSB launch as it is now. Is there anything that would make you scratch your head with what you see? Something you see stand out as seriously promising? Causes for concern?
Rogers: SASB was developed as a U.S. standard focused on an arcane and specific definition of materiality. The SASB standards are not fit for purpose for use in global markets and are a nightmare for a regulator that would have to develop the capacity to enforce across 80 or so industries. It’s not possible, even for the SEC.
The learnings from SASB are important. Adopting standards before following due process that their own constitution requires is concerning right out of the gate. A conceptual framework shows respect for the constituents and the process of standards setting, and creates trust with those who may adopt the standards.
The second area of concern is the lack of harmonization with GRI and the EU, as the EU is a major IFRS jurisdiction. It’s just setting up a needless power struggle, and nothing will have been accomplished — just a different flavor of soup.
Eccles: My Oxford colleague, Richard Barker, and I were working on a "Green Paper" on the pros and cons of FASB and IASB setting standards for nonfinancial information. It was dramatically apparent that this was not a topic they wanted to discuss. So, when the IFRS Foundation announced its consultation to establish the ISSB, it took my breath away.
It’s just setting up a needless power struggle, and nothing will have been accomplished — just a different flavor of soup.
My first concern is whether the EU will support the ISSB, or just focus on its taxonomy and Corporate Sustainability Reporting Directive (CSRD). The big issue here is their framing of "double materiality." I have no problem with the EU asking companies to provide information that meets the needs of all stakeholders, but I see no rational reason why jurisdictions wanting to protect investors wouldn’t seek to achieve a global baseline of consistent standards.
The second problem is in the U.S., where the SEC is already getting substantial pushback about even modest requirements for reporting on climate. Third, private companies should report according to ISSB standards even if they don’t have to report their financials. Fourth, we can’t underestimate the implementation challenges of consolidating two NGOs into a complex standard setter.
Harrison: Greta Thunberg’s take, shared by many in the climate activist community, is that COP26 and the myriad announcements we heard from businesses and governments are more of the same "blah, blah, blah" that got us into the current "Code Red for Humanity." Can you share why the formation of the ISSB is substantive, and not more "blah, blah, blah"?
Rogers: I stand with Greta on this one. At the end of the day, ISSB is another voluntary standards setter with no enforcement capabilities. So, they must have buy-in from the regulators overseeing the markets they serve. The EU has enforcement capability. So their standards, developed by EFRAG and GRI, actually have teeth. So far, ISSB is just "blah, blah, blah."
Eccles: It’s important to distinguish between standards and targets. What these ISSB standards will do is provide accurate information on the progress companies report on meeting these targets they set for themselves.
Mandated reporting according to a set of standards is not a silver bullet. Corporate form that establishes the role of companies in society is also important. Climate- and ESG-competent boards are essential, as is executive compensation tied to targets. With standards, it will be possible. A carbon tax, also no silver bullet, is important, as are regulations such as mandated carbon reductions. Standards from the ISSB are a necessary but not sufficient condition.
The EU has enforcement capability. So their standards, developed by EFRAG and GRI, actually have teeth. So far, ISSB is just 'blah, blah, blah.'
Harrison: The alphabet soup of reporting frameworks and standards has been an ongoing source of friction for investors in their ability to compare issuers’ sustainability performance. What does the ISSB’s formation mean for the future of the infamous soup?
Rogers: Several have been sunsetted, but not the GRI, which was the most important one to coordinate with for establishment of global standards. They are a credible global standards setter with tremendous adoption. There’s still a lot of blending needed for the alphabet soup to gel. Oddly, the U.S. market has been left unsupported by a dedicated standard setter. Perhaps the FASB will become motivated and a Phoenix will rise from the ashes.
Companies are caught in the crosshairs of political posturing, and standards setters are providing an excuse for inaction. More companies will begin to own their own stories, developing their own metrics to communicate because the chaos is impractical to implement. There will be a backlash if things don’t stabilize.
Eccles: The consolidation of the VRF and CDSB into the ISSB takes out the acronyms of SASB and IIRC and CDSB. Remaining are EFRAG, GRI, the CSRD and whatever acronym comes out of the SEC, if any. If we’re not careful we will have replaced one set of NGO acronyms with another alphabet soup of government ones and one NGO.
The key will be whether these different standard setters work with or against each other. I just hope they will seek to collaborate with the ISSB rather than dismiss it as insufficient. Time will tell whether all these actors can rise above their own mission and egos for the greater good.
Harrison: The ISSB is meant to "encourage" the uptake of the standards globally. Can you give a bit more color as to what the encouragement could look like, and how you see this tying into the SEC’s renewed focus on climate?
Rogers: IFRS can encourage uptake of ISSB standards in IFRS jurisdictions. But it is still voluntary — the standards will have to be relevant, cost-effective, drive the desired behavior and not have unintended consequences in these global jurisdictions. That won’t look the same for all markets. So the ISSB has to intentionally design principles based standards that can be tailored by the jurisdictions, in the way that IFRS is tailored by theirs.
I don’t see any tie-in of ISSB’s work into the U.S. market. The SEC’s comment letter template is an excellent view into what they are looking for on climate disclosure. They operate under a heavily regulated environment with a very specific definition of materiality and they are sensitive to regulatory capture. I doubt they will adopt ISSB’s global sustainability standards. They might "accept" it if global companies that list on U.S. exchanges provide the information, but they won’t require it of U.S. companies.
Global standards, like global trade, are a myth. Celebrating the creation of ISSB as a victory for a single unified global sustainability standard misses the true advantage of ISSB.
Eccles: The situations in the U.S. and Europe are simple. Government agencies that set standards can mandate their use for reporting, or not. I’m not really sure the ISSB can do much beyond encourage. In the end, governments will decide whether to mandate these standards.
IFRS [standards] are only put into practice when mandated. Hopefully the EU will acknowledge the ISSB as setting a global baseline which it "tops up" with the CSRD. I’m sure the U.S. won’t accept the ISSB’s standards outright. What will hopefully happen is an acknowledgement and incorporation of the ISSB’s work in the SEC’s regulatory ruling process.
The ISSB can immediately leverage the strong base of support in the investment community for SASB’s work. Investors want industry specific information, and information from every company on a few key issues such as climate change and human capital, and SASB was designed to do exactly that.
Harrison: The formation of the ISSB has been widely celebrated in the green finance community. As the dust settles since the announcement earlier this month, do you see any misunderstandings of what it’s capable of solving?
Rogers: Global standards, like global trade, are a myth. Celebrating the creation of ISSB as a victory for a single unified global sustainability standard misses the true advantage of ISSB. The IASB has created the perfect structure for supporting global jurisdictions while allowing adaptation to specific market use cases. It operates essentially as a clearinghouse, establishing a principles-based framework which is then tailored, translated and adopted to varying degrees in different jurisdictions based on local conditions.
The opportunity for ISSB is not to achieve global standardization, but to align global markets around an approach to sustainability standards setting and core principles, while allowing for jurisdictional differences in implementation.
Eccles: There is potentially a lot of misunderstanding, both willful and from lack of knowledge. I’ve already addressed most of the critical issues, at least in my view. The ISSB is critically important but it’s not a cure-all. And the ability of its standards to make the difference they can will be heavily influenced by organizations and factions over which the IFRS Foundation has no control.
Harrison: Is there anything you see that the ISSB is equipped to solve that you don’t feel has gotten enough recognition or inquiry?
Rogers: When you are a standards setter, everything looks like a standard that can be set. But this is not necessarily desirable or feasible, and it misses the advantage that ISSB will have of a bird’s-eye view of sustainability issues globally. The ISSB’s superpower may lie in illuminating issues that are emerging across the global markets for consideration by investors and the broader markets. SASB’s materiality map was so valued by the markets because it illuminated what mattered per industry.
Importantly, technology is enabling workarounds for long, drawn-out standards-setting processes. Artificial intelligence can create structured data from unstructured information in a way that it couldn’t a decade ago. So, standards setters are not competing with each other, they are competing with technology. But they don’t realize it. The ISSB will need to blaze its own trail.
Eccles: The ISSB needs to pay as much attention to social issues as environmental ones. Climate change will affect those with the fewest resources to adapt. I understand why the ISSB is starting out with a focus on climate, with its prototype climate requirement. It has laid a conceptual foundation for addressing other issues through the general disclosure requirement.
Investors are increasingly concerned about income inequality. It is leading to political polarization and rifts in the international community. Climate change and income inequality are destabilizing system-level issues that will make it hard for universal owners to earn the returns they need for their ultimate beneficiaries.
Standards setters are not competing with each other, they are competing with technology. But they don’t realize it.
Harrison: Bob, you once wrote that the "ISSB is turning out to be a Rorschach test across the ideological spectrum." What are the inkblots showing now, and how do you see ideological convictions across both finance and regulation in the U.S. affecting the ISSB in its first chapter?
Eccles: I rue the situation in the U.S. Climate and sustainability are like COVID-19, a test of ideological purity for the GOP. Look at what SEC Commissioner Hester M. Peirce has to say. The SEC is doing its best to get some baseline standards in a difficult political environment.
You have crazy things like the Attorney General of West Virginia [Patrick Morrisey] saying he’s going to sue the SEC, and people like Sen. Marco Rubio (R-Florida) with his inane Mind Your Own Business Act. I’ve even heard rumblings that some U.S. business organizations are thinking about suing the SEC as well should they issue any guidance on climate reporting.
U.S. investors recognize the importance of standards for sustainability reporting. Nine of the 10 largest global asset managers are based in the U.S. At least the large and global U.S. companies will find the ISSB standards very useful, and investors will put pressure on them. Once they develop the systems to start reporting according to these standards they will continue to, even with a future GOP president.
In the U.S., it’s going to come down to rationality versus ideology. I think rationality will win because that’s how investors and companies make decisions. Politicians can make it easier or harder but in the end they must bend to the will of the people and it is the people’s interests that investors ultimately represent.
Harrison: Jean, you shared in 2018 that "a powerful narrative had been created through the work of SASB … The most important next step beyond codifying the standards is evolving the narrative and ensuring a literate market … this is what the language of SASB was designed to do." If SASB was an early dialect for sustainability standards — in language with, as you said, the "potential to change the course of history, by directing capital to more sustainable outcomes" — where are we in the evolution of that narrative now?
Rogers: Using the language of performance is critical to achieve progress on anything. If we continue to cite [assets under management] backing a standard, or the number of companies reporting against a framework, we define success in terms that are divorced from the change we need to see in the world. People begin to think that AUM committed to ESG investing equates to progress.
We have to use baseline data to present performance in context. The standards should enable that and, if not, they are focused on the wrong things or they are attempting to standardize too much. The standards setters need to model the language that other stakeholders, companies and investors need to emulate, so that the market develops literacy in terms of what performance looks like. Focusing on core issues, like decarbonization and diversity, will help.
When I see a sustainability standards setter publish data with aggregate performance improvements on a particular issue for companies using their standard, then we will know the standards are effective and we will be speaking the language of sustainability.