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What is the big news at COP26 for ESG reporting?

By Henry Daubeney, Global Head of IFRS & ESG Reporting, PwC UK

Today saw a major step to globally aligned ESG reporting. At the COP26 conference, the International Financial Reporting Standards (IFRS) Foundation Trustees announced the creation of the International Sustainability Standards Board (ISSB) and confirmed that the Trustees are in advanced stages in appointing the Chair and vice-Chair to the Board. The announcement also confirmed that offices in Frankfurt and Montreal will be responsible for key functions supporting the Board, with other offices across the world being announced soon.

I have strongly supported this initiative and welcome this milestone announcement. Companies and stakeholders have struggled with the myriad of sustainability standards, frameworks and metrics. The ISSB standards will provide the foundation for consistent and global – environmental, social and governance (ESG) reporting standards that will enable companies to report on ESG factors affecting their business.

This announcement is good news for investors, who told us in PwC’s 2021 Global Investor ESG Survey that their decision making would be better informed if companies applied a single set of ESG reporting standards (74% agreed). They also said (73%) they want companies to use a recognised framework when preparing their ESG reporting. 

The ISSB’s standards should help provide globally consistent, trusted, non-financial reporting that is as robust as financial reporting today. They can also enable investors to have a better understanding of a company’s long-term performance and value creation prospects – 75% of the respondents to our survey said that reporting and disclosures should show a link between ESG risks and opportunities and the financial performance of a company. It is also critical to investors to be able to compare more effectively across companies and over time. These standards should go a long way to meeting investors’ expectations and needs. 

I am pleased to hear that the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF, including the Integrated Reporting Framework and the SASB standards) will be consolidated into the Board by June 2022, strengthening the impact of the new proposed standards and continuing the convergence agenda I have been advocating.

The good news is a lot of preparatory work has been done by the Technical Readiness Working Group (TRWG), and the new Board will receive its output to help it to move quickly. I am delighted to see that prototype standards, based on the work of the TRWG have also been issued which will help all parties get ready for the standards when released.

“Companies’ response to climate change is arguably the most pressing issue facing society, and so focusing initially on climate risk seems sensible.”

So, what can we expect to happen next? The Board’s proposals on its presentation approach, based on the prototypes, is likely to be published by the end of the year. These will cover the general approach for disclosure of material information and a hierarchy of the guidance to use if an ISSB Standard is not yet in place for a material ESG topic. It will be based around the four pillars used in the recommendations by the Task Force on Climate-Related Financial Disclosures (TCFD): Governance, Strategy, Risk Management, and Metrics and Targets. 

There will also be an exposure draft standard on climate reporting, which will establish narrative-based disclosures linked to the four pillars and cross-industry metrics including greenhouse gas (GHG) emissions. Proposals on industry-specific disclosure and metrics are also coming soon. 

I firmly believe it is important that the ISSB moves beyond climate to other key ESG areas at pace. Companies’ response to climate change is arguably the most pressing issue facing society, and so focusing initially on climate risk seems sensible. Investors in our survey identified reducing Scope 1 and Scope 2 GHG emissions as the top priority for companies. Second on their list was worker health and safety, followed by improving workforce and executive diversity, equity and inclusion. There is a clear message that while climate is critically important, social issues are not far behind. 

The ISSB’s standards will focus on enterprise value and will provide the foundation for ESG reporting. But as I have said before, the long-term goal must be to move to the wider societal impact reporting on ESG. Policy makers can therefore use the ISSB standards as the building blocks upon which they expand to meet their broader objectives of societal impact reporting. 

I believe the creation of the ISSB is a transformational event for ESG reporting. However there is still much to be done and meaningful engagement as standards are developed is vital – so please, get involved, respond to the proposals, and get your views heard.

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