The potential creation of a Global Sustainability Standards Board (SSB) will push sustainable financing forward in a big way, allowing it to put more effective pressure on companies, so that they also commit themselves to a sustainability plan. The transition to carbon neutrality, in their interest and in the interests of the planet.
The net carbon target by 2050 is being adopted by Canada and many countries, as well as a growing number of companies and investors.
The mission of the Sharia Supervisory Board is to set international standards that regulate companies’ disclosure of information of an environmental, social and governance nature, that is, in relation to their actions and their impacts on the environment, but also on social management and good governance.
A powerful complement to public policy, sustainable finance, which takes environmental, social and institutional governance factors into account in capital allocation decisions, is the most significant change to happen in the financial system in decades. Better yet, unlike other dubious innovations, this transformation is necessary for the common good.
But so far, in the absence of comparable data, investors and bankers have struggled to evaluate companies’ efforts to reduce their carbon footprint and take advantage of the many business opportunities available to them in the transition to the green economy.
The problem stems from the proliferation of organizations offering incomplete, distracting and redundant analytical frameworks, standards and commitments. In short, a mess of goodwill.
The problem is the same for companies keen to show their progress. They don’t know where to go. Worse, the confusion allows some to pretend to be anything.
The SSB was proposed last fall by IFRS, the body that oversees the International Accounting Standards Board (IASB), which sets international accounting standards, except for a few countries, including the United States.
From around the world, nearly 600 private and public organizations have supported the initiative: institutional investors, regulators, and professional associations, as well as figures such as Mark Carney, the UN Special Envoy for Climate Action and Finance. In Quebec, Caisse de dépôt, PSP Investments, Jarislowsky Fraser, Addenda, Auditor General in Quebec and Montreal City (jointly with Toronto and Vancouver) sent letters of support.
The Foundation for International Financial Reporting Standards (IFRS) will announce the modalities of operation of the SSB in September, with the goal of making the official announcement at COP26, the United Nations Climate Change Conference, to be held in Glasgow in November.
Much remains to be clarified, but it is certain that the Sharia Board will not seek to reinvent the wheel and that it will rely particularly on the work of five organizations that have already paved the way. Two of them deserve special attention: TCFD and SASB.
Many institutional investors, bankers and insurance companies, including the eight largest public pension funds in Canada, have called on companies to adopt the disclosure framework of the Climate Change Financial Reporting Task Force, better known by its acronym TCFD.
Created by the Financial Stability Board and bringing together regulators and central banks, TCFD offers a detailed approach to help companies communicate about how to manage climate risk. It is set to become a major tool for measuring companies’ progress towards carbon neutrality by 2050. New Zealand and the United Kingdom impose it on their companies, and other countries may commit to it in Glasgow.
Another framework that investors highly recommend is the Sustainability Accounting Standards Board (SASB) framework, launched 10 years ago at the initiative of funder Michael Bloomberg, and covering a broad range of ESG topics, with standards amended for 77 industry sectors.
One of the important issues to be identified will be the materiality test, which allows for sorting the information that will be disclosed or not, according to the size and nature of the business activities. What information is relevant to the disclosure? And above all, who cares?
At least initially, we will likely limit ourselves to the standard used for financial statements, that is, information that is useful to investors and lenders. However, governments will want to require more disclosure of information to understand more broadly the company’s impacts on the environment and society. The European Community is already calling for very complete transparency in this regard.
Presenting ESG information in a coordinated manner would be an important step forward, but it is not sufficient. According to the International Organization of Securities Commissions (IOSCO), of which the Autorité des Marchés Financiers is a member, the creation of the FCA is promising, as international standards will “establish mandatory disclosure by companies,” which Canadian regulators will do need to be seriously considered .
As with financial statements, independent auditing must also be imposed to ensure the correctness of ESG information disclosed by companies.
Meanwhile, it is increasing pressure from large institutional investors that is pushing companies to open their kimonos. Those who now align with the TCFD approach and embrace the SASB standards are moving in the right direction. SSB standards won’t surprise them.
Better yet, they will eventually get cheaper and more abundant capital, as investors increasingly prefer companies that take environmental, social, and governance issues seriously and avoid those that sleep on gas.
* Mayville Tremblay is also Chairman of the Accounting Standards Oversight Board, which oversees two boards of directors responsible for establishing public and private sector accounting standards in Canada. These three organizations support the establishment of the Sharia Supervisory Board, but he speaks here in his personal capacity.
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