By Gilly Lord, Global Leader for public policy and regulation, PwC UK
On 29 July, the International Sustainability Standards Board (ISSB) closed its consultation on their first set of global reporting standards. This marked an important moment for anyone who cares about corporate transparency.
The demand for organisations to provide robust reporting across a far broader range of non-financial metrics has been increasing rapidly, while the ability to deliver on that need has lagged. A key cause of the mismatch between expectations and performance is the fog created by the lack of a global consensus on reporting standards.
The closing of this consultation period is a major step forward, with significant implications for how companies report on their performance. Combine the progress shown by the ISSB with the prospect of mandatory sustainability reporting in Europe from 2024 as a result of the EU’s corporate sustainability reporting directive (CSRD), the imminent end of Europe’s own reporting standards consultation process, and action from the SEC, and we are seeing rapid progress towards new reporting requirements that will significantly increase the quality of information available to stakeholders. Sustainability information for many businesses is currently hard to interpret without deep immersion in a scattered and rapidly changing system of standards; however, with alignment, it could become as clear and comparable as financial information.
Progress is of pressing importance. Reporting is not about creating reports; it is about empowering management and stakeholders with the information they need to allocate capital and make choices. In our survey of global investors, 79% said how a company manages ESG is an important factor in their investment decision making. Reflecting dissatisfaction with the fragmented reporting landscape, a similar percentage (74%) said a single set of ESG reporting standards would help their investment decision-making. And, of course, metrics beyond those classically viewed as ESG - like customer metrics - are also crucial as they can be a good barometer of a company’s ESG efforts.
ESG isn’t just on the minds of shareholders. In our recent consumer survey, 40% of respondents said social actions affected their purchasing decisions. And in our global survey of workers, half said that transparency over environmental impact was important to them, while almost two-thirds prioritised health and safety.
However standard setters still have more work to do as currently, the emerging approaches from various standard setters are not fully aligned.
One issue is the different conceptions of ‘materiality’ used by different standard setters. The ISSB starts from the perspective that materiality is defined by the impact of an issue on enterprise value; while the EU has a broader approach which encompasses both the impact of an issue on an organisation and the impact of the organisation on society. Although this distinction is significant in theory, in practice the two approaches create a big overlap, particularly since sustainability reporting is designed to consider impacts on the future, not just tell a story about the past. We can make significant progress by focusing on the overlap.
A more immediate concern is that the standards need to be interoperable, or able to work together. For example, it’s not yet certain that the EU will decide to accept the ISSB standards as a way of complying with many of its reporting requirements. Without this “equivalence” decision, the shared goal of being able to compare the performance of organisations across borders won’t be achieved. Standard-setters will also need to collaborate to align terminology and definitions, value-chain reporting boundaries, indications of information quality and approaches to assurance. Without this alignment, trust could be eroded as businesses may end up reporting different numbers for the same metrics across different jurisdictions. It is my hope the ISSB, EU, SEC and others work together collaboratively to deliver the kind of robust and globally aligned system stakeholders are demanding.
In the meantime, businesses need to prepare for a regime requiring more, and more robust, reporting. I would advise three things. First, start with what you need to know from a management perspective. Reporting shouldn’t just be for external consumption, it should help you make better decisions. Second, think about systems not reports. Collecting and verifying information is hard. The investment and effort that goes into financial reporting and assurance is significant, and a similar level of rigour and assurance will be expected for non-financial information. It will help to start early on that journey. Third, keep a close eye on developments in the policy space. Standards are shifting rapidly, and so are requirements. It is important not to be caught out by expectations that are growing fast.
The closure of the ISSB consultation period is a significant moment for stakeholders, companies and governments. The route towards a globally aligned non-financial reporting framework is becoming clear, but collaborative cooperation of standard setters is vital.
Global Leader, Public Policy & Regulation, PwC United Kingdom
Tel: +44 (0)20 7804 8123