This opinion piece by EY partner Terence Jeyaretnam is the latest in a Footprint viewpoint series featuring leading sustainability practitioners.
Reporting standards under development by the International Sustainability Standards Board, one on climate change and the other on sustainability, will entirely transform ESG governance, even in the most mature of ESG reporters.
The ISSB Standards will carry the weight of accounting standards, requiring the information to be presented, signed off, assured and reported in a manner consistent with financial statement reporting.
Therefore, we are likely to see company finance functions stepping into govern ESG data and information, and they will need to develop the capacity and capability to do so.
Sustainability personnel - who spend a vastly disproportionate amount of their time today managing this information - are likely to be relieved of this burden, leaving them freer to plan and execute ESG strategies.
We will also see audit committees formally take over the governance and assurance oversight of ESG.
In addition, we are likely to see ESG assurance become integrated into the way broader assurance is undertaken, so that the connections between financial reporting and ESG can be carefully assessed and signed-off.
There will be pain for many, but those that have invested in ESG reporting over the past decade will gain competitive advantage.
Terence Jeyaretnam
Nasty surprise to many
Sustainability reporting has become the mainstay of the ASX 100, and perhaps part of the ASX 200.
But, beyond this cohort of large companies, the quality of reporting is very patchy.
ISSB Standards will change this. Depending on what sort of phased approach to adoption is recommended by the ISSB and the Australian Accounting Standards Board(AASB), we will see these businesses needing to get organised, resourced, and prepared for ESG reporting.
There will be pain for many, but those that have invested in ESG reporting over the past decade will gain competitive advantage.
Resources will be limited, and therefore opportunities for digitising and automating this information will need to be part of the solution.
Consistency will give birth to efficiency and value
Having a globally consistent, comparable, reliable, and verifiable corporate reporting system that can provide all stakeholders with a clear and accurate picture of an organisation's ability to create sustainable value over time will be transformational for business strategies.
This consistent information will enable investors to better understand ESG risks and will therefore transform capital markets.
It will also allow financiers and insurers to characterise risk in a clear and useful way when it comes to ESG matters.
Regulators will also be in a position to implement their mandates in a more coherent and equitable manner.
The development of the ISSB standards also presents a unique opportunity to prevent any further fragmentation of current sustainability disclosure requirements that started with the formation of the Global Reporting Initiative (GRI) around 25 years ago.
Other frameworks now include those developed by the International Integrated Reporting Council, the Sustainability Accounting Standards Board (SASB), the Carbon Disclosure Standards Board, the TCFD, and the GRI.
These entities (other than GRI) have been amalgamated into the ISSB, paving the way for it to consolidate, formalise and integrate ESG into business management accounting.
What do the next steps look like?
The ISSB will review submissions on the draft standards, and make amendments as appropriate, with the aim of finalising the standards by the end of 2022.
Once they are released, it will then be up to individual national accounting standards bodies to recommend local adoption.
The Australian Accounting Standards Board has already started consultation and stakeholder engagement on the standards.
Given the Australian government's support via the G7, as well as broad consensus that issues such as climate risk is core to business risk (exemplified by the rapid adoption of TCFD by Australian corporates, investors and regulators), I believe the AASB will greenlight the ISSB standards.
Some positive reflections
Collaboration and coordination between sustainability disclosure initiatives and financial accounting standard-setting is important.
The ISSB is best placed to achieve this given its connection to the International Accounting Standards Board.
A global approach to sustainability standards-setting is vital to ensure disclosures on issues such as climate change are made in a clear, common and comparable way that establishes suitable criteria for assurance and serves the needs of investors, customers and regulators.
In financial reporting, it is common to see companies providing both GAAP and non-GAAP information, and this is likely to continue, as entities believe the additional data and information can provide useful context and detail.
We are likely to see this in ESG reporting as well, with companies responding to ISSB standards via regulatory filings, but continuing to provide additional and supplementary information on sustainability performance.
In due course, companies will bring this information together via the Integrated Reporting framework into their value creation narrative.
Terence Jeyaretnam is a Partner in Climate Change and Sustainability at EY in Melbourne, a Senior Advisor to SASB (now part of ISSB) in Australia and a member of the Technical Reference Group of IFRS Foundation's ISSB.
He is also a member of the Sustainability Reporting Advisory Group of the AASB, and Chairs the Sustainability Committee of G100.
