The annual United Nations Climate Change conference (COP26) is organized every year since 1995 and discusses the most urgent climate matters. This year, it was set against an even more dynamic background than usual, with impending mandatory sustainability disclosures in the EU and the announcement of the ISSB launch.
ISSB – the IFRS game-changer in ESG reporting
More often than not, data on ESG reported by financial institutions is like a box of chocolates, to quote Forrest Gump: “you never know what you’re gonna get”. As financial entities and companies have been left to their own resources, flexibly choosing how to report their sustainability data (if at all), the end result is a colourful array of documents and data that boasts just how green-friendly they are. However, if the data is so dispersed and unstandardized, can you be 100% certain that what is reported as environmentally-friendly is really precisely that?
That is one of the reasons why the International Financial Reporting Standards Foundation (IFRS Foundation) announced the launch of the International Sustainability Standards Board (ISSB). The main objective, as per the IFRS Foundation, is to develop a global baseline of sustainability disclosures for the financial markets, IFRS Sustainability Disclosure Standards. The goal of ISSB is to help investors with making informed investment decisions, based on a set of criteria assessing companies’ ESG commitments. The ISSB will help investors to understand how companies are responding to ESG issues such as climate risks, and allocate funds in projects that meet sustainability criteria. The IFRS also announced the merging of the Value Reporting Foundation (VRF, including SASB Standards and Integrated Reporting Framework) with the Climate Disclosure Standard Boards (CDSB) into the ISSB. IFRS believes that these two activities combined will become a global sustainability disclosure standard-setter.
Green Finance and ESG reporting: two sides of the same coin?
Another significant subject raised during the conference was naturally green finance, also referred to as sustainable finance, which is a process of considering ESG factors to make decisions that will result in sustainable economic activities. The financial sector is determined to back up investment decision-making in the financial sector with the involvement of environmental, social and governance factors. Industry leaders are firmly focused on green and sustainable strategies, integrating them in their roadmaps and adapting funding mechanisms to their sustainable development commitments.
On the other hand, ESG reporting is related to an organization’s environmental, social, and governance performance. Based on the outcomes of the reporting, financial institutions can decide whether they want to invest in specific activities or organizations. During COP26, The European Banking Authority made a strong statement in which they outlined the efforts to update and enhance the supervisory prudential regulatory framework in the context of ESG. The EBA acclaims its role in supporting the European banking sector towards the transition to a more sustainable economy and mitigating risks stemming from climate change and ESG factors. European Banking Authority will also embed ESG considerations into its regulatory impact assessments, risk analysis and stress testing.
Climate-related disclosures: no longer a maybe
The third day of the conference was devoted to finance and that’s where we heard a few announcements related to mandatory climate risk disclosures. Just before the conference started, the United Kingdom announced that from the first half of 2022 largest UK-registered companies and financial institutions will be obliged to disclose climate-related financial information, joining the group of countries that have implemented mandatory sustainability disclosures. The trend of pressing companies to make their ESG data public could be observed as the IFRS Foundation established the ISSB to standardise sustainability disclosures globally.
The European Union also commits itself to become climate-neutral by 2050, supporting green jobs, green growth and green investments, connected to the introduction of the Corporate Sustainability Reporting Directive (CSRD). The CSRD will strengthen sustainability reporting rules for companies and help with the information collection for market participants and other stakeholders. The combination of Sustainable Finance Disclosure Regulation (SFDR), which intends to increase transparency on sustainability among financial institutions and market participants and CSRD, will (to an extent) close the information gap in ESG data. Standards will cover climate and other sustainability risks for companies and the impact that companies have on the environment. The EU assures that it is fully engaged in COP26 as all stakeholders need to join forces to tackle the climate crisis. The EU is not a lone actor in this green play, designing regulations and reporting requirements aligned with global standardization initiatives.
What's next for sustainability?
The financial sector needs joint, sustainable actions to be an integral part of the race for a green future. Many standard-setting organisations have been working towards a consistent global approach to sustainability reporting separately. We need internationally comparable and interoperable ESG disclosure standards and improved accessibility of data, to make a difference in capital markets. And initiatives like ISSB or the Task Force for Climate-Related Financial Disclosures (TCFD), are very much needed.