SASB moves forward on ESG standard-setter consolidation

The Sustainability Accounting Standards Board is finalizing a merger with the International Integrated Reporting Council, while watching efforts to establish a standard-setter overseen by the International Financial Reporting Standards Foundation.

At the same time, the IFRS Foundation has been hearing feedback on a proposal to create an international sustainability standards board that it would be overseeing alongside the International Accounting Standards Board that it already manages.

The more official international standards board could potentially pose a challenge to SASB, the IIRC and the other existing standard- and framework-setters, but it could also provide them with an opportunity to contribute their expertise to the makeup of such a board.

SASB officials discussed the changes during an online board meeting and press conference last Friday.

“On the merger with the IIRC, one thing we heard a lot in the marketplace was a call for simplification and consolidation,” said SASB chair Jeffrey Hales during the press conference. “One thing that we’ve been doing … with the related standard-setters and frameworks that are in a similar space is recognizing that we are all trying to serve this particular market need and trying to develop solutions for. I think the calls for simplification, harmonization and consolidation are really reflective of the need to help the market understand better how we accomplish that.”

SASB saw opportunities for further consolidation by working more closely with the IIRC. “We have a very similar focus on trying to fulfill the needs of capital market [stakeholders] like traditional accountants who deal with financial statements,” said Hales. “The IIRC is focused on integrated reporting and trying to bring the capitals into the investor decision-making space — to the extent that the traditional financial statement hasn’t captured that market need — and integrating that with other information in the financial statements.”

He sees the two standard-setters as taking a similar complementary approach that would fit together under the umbrella of the new Value Reporting Foundation that would oversee them both. “We have alignment, but we do something different,” said Hales. “They provide that integrated connective tissue, and we provide a set of very specific industry-based standards, topics, metrics and clear guidance about how to produce disclosures around those standards.”

The Biden administration’s focus on climate change and renewable energy, and its move to rejoin the Paris climate agreement, represent positive signals for sustainability reporting. Hales pointed to interest in climate issues from the new acting chair of the Securities and Exchange Commission, Allison Herren Lee (see story).

“We are very interested in what the Biden administration is going to do, and we are encouraged to see that they have made climate in particular a priority,” said Hales. “ESG disclosures, ESG issues, sustainability issues more broadly, but including disclosure as part of what they’ve identified as an opportunity for improvement, we find that quite encouraging. But within that you can think of the role of the SEC. They … they have an opportunity to help facilitate improved sustainability disclosures. For example, the acting chair of the SEC has created a special advisory role to the chair around climate, and she also recently commented on the guidance that the commission gave in 2010 about whether companies should be reporting climate-related issues.”

He noted that the SEC plans to do reviews of the extent to which companies are complying with the existing SEC rules around climate disclosures. He also pointed to the appointment of an acting director of corporate finance, John Coates, who recently indicated that ESG disclosure will be an opportunity for the SEC to move the field forward.

Whether or not the Biden administration is able to pass more far-reaching climate legislation through a narrowly divided Congress, the SEC focus will help with encouraging more climate-related disclosures. “I suspect that’s a top priority for the commission,” said Hales. “Even if there’s no legislative mandate for the SEC to do more, that’s just with the existing legislative framework. We’re quite encouraged by what this could mean for better information for the marketplace around sustainability issues.”

“We’re certainly continuing our effort with the Group of Five,” said Hales.”We recently did a prototype for a climate-related financial disclosure and looked at how the guidance we provide under our organizations provide frameworks or standards to support the reporting underneath that, how they fit together to meet the needs around complicated disclosure reporting challenges like you have with something as complicated as climate-related financial disclosures. … I don’t think anyone is suggesting there will suddenly be one set of standards. It’s an ongoing effort to make it easier for companies to use the collection of guidance that’s out there, best practices to efficiently and effectively to report.”

The five standard-setters and framework-setters are taking a “building block” approach to harmonizing their standards, according to David Parham, SASB’s director of research projects, who discussed the progress they have made during last Friday’s SASB meeting, along with the IFRS Foundation’s consultation on creating an international sustainability standards board.

“That consultation concluded at the end of last year, and that was really focused on the IFRS trustees seeking to understand what the foundation could do around sustainability reporting,” he said. “A key aspect of that consultative document noted the urgent need to improve the consistency and comparability of sustainability reporting, which certainly is a language that SASB speaks.”

He noted that the IFRS Foundation recently released a first look at some of the results that it received during the consultation period (see story). “They shared that they received 576 comment letters, quite a bit of interest, which is to be expected,” said Parham. “Those responses indicated a growing and urgent demand to improve the global consistency and comparability in sustainability reporting, really reinforcing what the IFRS [Foundation] had found in that task force exercise. And they also observed a demand for the IFRS Foundation to play a role. That again was consistent with what the task force had discovered in their preliminary investigation into the issue.”

The next meeting of the IFRS Foundation trustees will take place this month, and the foundation plans to produce a definitive proposal by the end of September, possibly leading to an announcement at COP26 in November, he noted.

“Of course, SASB is supportive in principle of what the IFRS is pursuing in this area given the importance of this information for capital markets, but needless to say it’s an incredibly important development in the field, one which we will be monitoring closely and continuing to remain engaged with,” said Parham.

SASB posted a comment letter in December supporting the proposal in principal, but suggesting that it continue to play a role if such a board were to be set up.

SASB CEO Janine Guillot suggested in a blog post on SASB’s website that the boards could operate together. “The feedback we received from market participants also made clear that we need to reiterate this important point: The IFRS Foundation’s proposal and the merger of SASB and the International Integrated Reporting Council (IIRC) into the Value Reporting Foundation are not competing initiatives — quite the opposite,” she wrote. “By merging two organizations focused on enterprise value creation, we hope to clarify and simplify the field. The VRF stands ready to engage with the efforts of the IFRS Foundation and others working toward global alignment on a corporate reporting system.”

Firms in action

Accounting firms are increasingly getting involved in sustainability reporting and assurance services as well. KPMG hosted a webinar last Friday on ESG reporting.

“Given the increased focus on ESG, it’s no surprise that in our recent KPMG CEO survey, CEOs confirm that they are aware that corporate responsibilities are expanding and awareness on ESG efforts are top of mind for stakeholders, investors and customers,” said Brian Mace, director of finance transformation at KPMG US. “One of the surprising stats to come out of this research is that 71 percent of CEOs stated they wanted to lock in sustainability gains that they have made as a result of business model changes due to the pandemic. These leaders will be looking for their teams, like finance, to help find ways to ensure that these gains are not lost.”

KPMG has been rolling out services globally to focus on areas such as climate risk, economic and social development, ESG strategy, sustainable finance, and measurement assurance and reporting. “We really feel like these offerings are increasingly important today, and it allows our clients to create more profitable growth and drive it through their value chain while ensuring a more sustainable future,” said Katherine Blue, a partner and KPMG Impact national leader, and advisory Lead at KPMG US.

She pointed to a consumer products company that rallied their ESG efforts around something called an Ignite platform. “What was interesting about this is that it was centrally focused on innovation and how to accelerate business growth and value throughout the company using ESG,” said Blue. “They weren’t saying, ‘We’re going to report on ESG metrics or just manage risk,’ although that was certainly part of it, but they really wanted to use ESG as a transformative wedge or a business tool that allowed them to bring a lot of their innovation to the forefront and drive the business value.”

Other firms are also getting involved in ESG efforts. A recent survey by BDO USA of 230 corporate board members at public companies found that 25 percent cited enhancing sustainability reporting as one of their top three ESG priorities in the next 12 to 18 months, while 29 percent said the same for the long term.

In the meantime, SASB is pushing ahead on its efforts to work with the other ESG standard-setters.

“This is a really big step forward,” said Hales during the SASB meeting. “It’s a great opportunity to help consolidate the field. In my view, we’re talking about how we’re trying to service the same market essentially. We are trying to provide decision-useful information to the capital markets. That is our goal. When we stay separate organizations, we may use the same words and people may question the extent to which we mean the same things, but it’s easier to bring clarity to that when we’re all part of one organization.”

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