There are two types of critics of corporate sustainability regulation: those who oppose any regulation at all, and those who are quick to point out what’s missing in new rules and regulatory proposals when they emerge. Recently, the latter have been making a lot of noise. No sooner was the European Union’s (EU) Corporate Sustainability Due Diligence Directive (CSDDD) approved by the European Parliament, than it was criticized for being too watered down. Similarly, the U.S. Securities and Exchange Commission’s (SEC) Climate Disclosure Rule has gotten more attention for the challenges its faced being implemented than for the changes it would bring once put into effect.
Meanwhile, as these naysayers were bickering about the details of each regulation, a not-for-profit, public interest organization focused on developing accounting standards, has slowly but surely established an approach to sustainability reporting standards that will increasingly define the future of corporate sustainability on a global basis. The International Financial Reporting Standards (IFRS) Foundation’s International Sustainability Standards Board (ISSB) was launched in November 2021 at the COP26 climate conference. By June 2023, the group had issued its first two reporting standards, and starting in January 2025, some companies around the world will need to start disclosing critical sustainability information in their financial statements.
Half the World Economy Already Signed Up
Immediately following the release of the IFRS sustainability standards, the International Organization of Securities Commissions (IOSCO), the international body for financial markets regulation and standards setter for securities regulators, provided their endorsement and called on regulators to incorporate the standards into their regulatory frameworks. As of May of this year, over 20 major jurisdictions representing roughly 55% of global GDP have agreed to use the ISSB developed standards, IFRS S1 and S2.
Unlike other sustainability-focused reforms, which address a wide swath of issues ranging from the climate to human rights, these first two standards are focused on climate reporting. In taking this targeted approach, the IFRS/ISSB has been able to quickly establish a strong foundation that will likely be expanded over time. When the initiative was first introduced, Erkki Liikanen, IFRS Foundation trustee chair explained the strategy as: “climate first, but not climate only.” In April of this year, the organization announced that its next two areas of research would be biodiversity, ecosystems and ecosystem services and human capital.
For now, the IFRS/ISSB has set its sights on harmonizing global sustainability reporting requirements for companies, with a particular focus on how they measure and report greenhouse gas emissions, using the Taskforce for Climate Related Disclosure (TCFD) as the guiding principle. Their goal initially is to consolidate the disparate approaches to climate disclosure reporting. Over time, it is likely they will also start to address other corporate sustainability disclosure topics that have been identified over the past few years, to get down to the ground truth of sustainability reporting.
Where this all gets interesting for large corporations is that, unlike jurisdiction-specific sustainability regulations, which are subject to political pressures and lobbying and vary widely from one country to the next, the IFRS standards are rapidly becoming the de facto obligations for corporate sustainability reporting, with respect to climate disclosures, for now. What the IFRS Foundation lacks in actual lawmaking power, it is more than making up for in practical, applicable guidelines that are rooted in financial reporting. That last detail might be the most important one of all.
Show Me the Money
Because these IFRS standards come from the world of accounting, they have been developed in such a way that the finance, compliance and legal departments of the world’s largest corporations recognize exactly how important they are, and they know exactly what’s required to meet them. Importantly, as I wrote last year when the standards were first introduced, the IFRS S1/S2 standards are different because they understand that risk management impacts financial performance.
Specifically, the IFRS standards make it clear to businesses that understanding inherent financial risks associated with the climate can be a catalyst to sustainability. When companies are told that their bottom-line financial statements need to address sustainability risks and opportunities alongside financial risks and opportunities to be compliant with global accounting standards, the emotion of sustainability requirements quickly disappears. Suddenly, it’s all about the money.
And, because the IFRS sustainability standards go into effect starting in January of next year, they will be the first major sustainability reporting requirements to have a real-world impact on the business community. When that process goes smoothly, as it should, following the extensive guidance the IFRS Foundation has provided in the run-up to this point, it will invariably grease the wheels for forthcoming sustainability reporting regulations.
Corporate Sustainability Wakeup Call
In some ways, the lack of drama with which the IFRS sustainability standards have been digested by global regulators and the business community, should serve as a wakeup call to all the various skeptics who’ve been calling out both the need for and the limitations of, sustainability reform and questioning its viability for real-world businesses. Sustainability risks and opportunities are business risks and opportunities. Period. Treat them that way on a balance sheet and it all makes perfect sense.