The Future of Sustainability Reporting Standards the Policy Evolution and the Actions Companies Can Take Today June 2021 Contents
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The future of sustainability reporting standards The policy evolution and the actions companies can take today June 2021 Contents Foreword 2 Introduction 3 State of play: sources of influence 6 Global variations in managing sustainability-related disclosures 8 Global standards outlook: through a macro lens 13 Recommendations for companies 18 Abbreviations 21 Lead authors 22 Contributors 23 Contacts 25 About this report 26 Endnotes 27 Foreword Foreword The shared global experience of the past year has illustrated the interconnectedness of our world, our vulnerability to the environment and the impact of global action. Public health, climate change, social inequality, diversity The most promising development is the expected launch Foundation, we recognize the need to instill and inclusiveness are challenges that need global of the International Financial Reporting Standards (IFRS) regional flexibility alongside a global standard. attention and innovative, collaborative solutions. We Foundation’s International Sustainability Standard Board The next 12–18 months are an opportunity for action also need a common language to measure and report (ISSB) at COP26 in November. As the body that sets and will likely result in developments that represent one on society’s progress and for the global economy accounting standards in much of the world, the IFRS of the most significant innovations in corporate to price externalities such as greenhouse gas emissions Foundation is well positioned to introduce the discipline accounting and reporting in decades. and environmental damage, allocate capital and make that exists in financial reporting into sustainability better decisions reporting, building on the linkage between the various Many businesses are preparing for future sustainability standards while respecting their different perspectives. disclosures and committing to transparency and Over the last 18 months, significant progress has been accountability before they are mandated. Now is the time made toward establishing global sustainability reporting We strongly support the IFRS Foundation’s proposed for companies and their leaders to work together with standards. The future of sustainability reporting creation of the ISSB and the development of robust, regulators and civil society to achieve consistent, global standards analyzes this progress across both developed globally consistent sustainability reporting standards. standards and contribute to this critical process that will and developing markets and recommends actions At the same time, we support efforts within the help define corporate reporting and accountability for companies can take now to navigate and prepare for European Union, United States and other jurisdictions to the next generation. emerging sustainability reporting mandates. develop regional standards that respond to local stakeholder needs and expectations. Like the IFRS Carmine Di Sibio Ruchi Bhowmik EY Global Chairman and CEO EY Global Vice Chair, Public Policy The future of sustainability reporting standards | 2 Section title Introduction The number of environmental, social and corporate governance (ESG) regulations and standards globally has nearly doubled in the last five years. Accompanying this rise are various reporting frameworks led by the “Group of Five” standard setting organizations.1 In addition, there are currently over 600 ESG reporting provisions globally, with many having differing interpretations of sustainability. The future of sustainability reporting standards | 3 Introduction The high number of guidelines about what ESG Figure 1: Voluntary and mandatory ESG reporting provisions information is required or recommended to be disclosed means companies face barriers and strained resource Number of ESG reporting provisions by region, 2020 capacities to focus on quality ESG disclosures. For Totals by year instance, publicly listed companies have to abide by Voluntary Mandatory mandatory financial and nonfinancial2 disclosure Europe 348 requirements issued by regulators and stock exchanges. Companies must also respond to varying requests for voluntary disclosures and assessment processes set by North America 104 141 266 ratings providers as the broader investment community 248 and shareholders are calling on companies to provide 16 31 greater transparency around sustainability risks. Africa and Middle East Asia-Pacific As a result of these different processes and requirements, 33 40 135 there are often significant variations in the information South America 75 99 disclosed about a company’s ESG performance. It is thus not surprising that there is a disconnect between the 38 37 increased focus on evaluating ESG performance from investors and the availability and efficacy of standardized nonfinancial data provided by companies. Source: Van der Lugt, C. T., P. P. van de Wijs, & D. Petrovics. (2020). Carrots & Sticks 2020 - Sustainability reporting policy: Global trends in disclosure as the ESG agenda goes mainstream. Global Reporting Initiative (GRI) and the University of Stellenbosch Business School (USB). Available at: https://www.carrotsandsticks.net/media/ 2016 2020 zirbzabv/carrots-and-sticks-2020-interactive.pdf ESG areas of scope ESG standards generally encompass the following: Environmental, e.g., waste management, emissions Social, e.g., human rights, labor rights, working Governance, e.g., ownership and structural impact, energy efficiency, air and water pollution, conditions, health and safety, employee relations, transparency, shareholder rights, board of environmental protection, and biodiversity loss employment equity, gender diversity and pay gaps, directors’ independence and oversight, diversity, and restoration anti-corruption, and impact on local communities data transparency, business ethics, and executive compensation fairness. The aim is that these standards help companies to better measure and manage their exposures to ESG-related risks and to become better corporate citizens by measuring, disclosing and managing the environmental and social impacts they create. The future of sustainability reporting standards | 4 Introduction Growing momentum The bigger picture Given the lack of consensus over what reporting Initiatives by institutional bodies such as the IFRS information is required and the need for comparability Foundation to harmonize disclosure will have to confront across and within jurisdictions, there has been a a host of political and regulatory issues arising from growing momentum towards a global harmonization of national and regional divergences, influenced by an sustainability-related financial reporting standards in ecosystem of stakeholders with different interests. This the last 18 months. The most promising development report explores this broader political context, which is the IFRS Foundation’s ISSB, set to launch at COP26 encompasses a diverse set of actors — ranging from in November 2021. Building on existing frameworks individuals to public and private institutions — who play and endorsed by the Group of Five, the World Economic a salient role in shaping the sustainability reporting Forum International Business Council (WEF IBC) and the debate. Actors embedded in this ecosystem approach the International Organization of Securities Commissions conversation with varying degrees of influence and often (IOSCO), the ISSB will be tasked with developing and different objectives. Furthermore, each actor is operating maintaining global sustainability-related financial in a political context that will ultimately affect the future reporting standards that are relevant to enterprise direction of the global sustainability reporting discourse. value. The IFRS Foundation’s extensive consultation with The report concludes by outlining recommendations stakeholders has concluded that there is an urgent need for how companies can navigate this dynamic and to accelerate the establishment of a high-quality, global, evolving terrain. sustainability-related financial reporting framework.3 .In their 5 June communique, the G7 Finance Ministers and Central Bank Governors expressed support for the ISSB and called for mandatory climate-related financial disclosures based on the Task Force on Climate-related Financial Disclosures (TCFD) framework. The IFRS Foundation has concluded that there is an urgent need to establish a global sustainability reporting framework. The future of sustainability reporting standards | 5 State of play: sources of influence State of play: sources of influence The sustainability reporting movement implement progressive changes in the E, S and G spheres. Figure 2: Sources of influence originated out of civil society and gained There are also top-down pressures from regulatory and standard setting actors that are promoting compliance The global sustainability prominence among a small number of socially and/or behavioral shifts through policy and best practices reporting ecosystem responsible, activist investors who aspired guidelines. Meanwhile, investors are directly influencing for companies to disclose their impact on companies to improve their ESG disclosures through Supervisory and broader stakeholders. ownership stakes and capital allocation.4 regulatory bodies The various players in this sustainability reporting Politics Standard setters In the past several years, the dynamics of the ecosystem can be broadly defined into three primary and policy Stock exchanges sustainability debate has dramatically shifted, with categories of stakeholder influence, with