In theory, 2022 will be a year for the International Accounting Standards Board to set its strategy and priorities for the next five years. In reality, though, one issue will dominate its agenda: the scramble to set binding rules for companies’ sustainability reporting.

“The No. 1 priority for accounting rulemakers in 2022 is to bring some rigor to the Wild West that is ESG reporting,” Karthik Ramanna, a business professor at Oxford university’s Blavatnik School of Government, said in a recent interview.

Currently, environmental, social and governance (ESG) reporting is erratic and inconsistent, with no binding rules. The establishment in November of a sister body to the IASB, the International Sustainability Standards Board, is supposed to fix that.

Announced at the UN Climate Change Conference, with heavyweight backing from groups including the Group of Seven countries and the World Bank, the sustainability board is to set a full range of ESG reporting standards aimed at investors. Although the new ISSB still has only one member, it aims to develop its first draft standard this year, covering climate change, and also to consult on where it should focus its attention next.

The drive for coherent sustainability reporting standards will heavily impact the IASB, which provides accounting guidance for most of the world—though not the U.S., whose rules are set by the Financial Accounting Standards Board.

Potential Overlap

The idea is that IASB will be responsible for financial accounting, while ISSB will be responsible for ESG. But many things remain unclear, including how the two boards will interact.

ISSB disclosures, not all of them financial, are to be made separately from the financial accounts, but the IASB has long emphasized that all material risks, including from areas like climate change, should be disclosed in the financials, too.

Feedback on IASB’s future strategy suggest that the users and preparers of accounts are also keen to see ESG issues reflected directly in the financials.

“It is paramount for companies to connect sustainability information with financial information,” said Yen-Pei Chen, an expert on corporate reporting at the Association of Chartered Certified Accountants. She pointed out that a technical working group is supposed to plug the gap until more formal cooperation agreements are drawn up between the financial and sustainability standard setters, but so far nothing concrete exists.

Richard Murphy, a Sheffield University accounting professor, said he didn’t see any formal cooperation arrangements between the two standard setters to ensure that sustainability risks are reflected in financial accounts, meaning that companies could just ignore the problems. The essential thing for improving corporate behavior, he said, is that the costs of unsustainable activity should appear in the reports.

“I’m in despair,” Carol Adams, a Durham University accounting professor, said about the ISSB’s failure to ensure formal cooperation with the IASB, and what she sees as a need for sustainability disclosures to go beyond the information needs of financial investors.

“It’s a rush job,” Adams said. “The emphasis is on producing simple, easy-to-introduce rules cheaply.” She said the ISSB rules miss the point by being so narrowly aimed at investors and would fail to show how companies impact their environment.

The ISSB remains at a very early stage of development, with only one of its 14 board members appointed so far: Emmanuel Faber, the former Danone SA boss, who became chair at the start of January.

Faber’s whirlwind 2022 agenda includes rushing through the climate reporting standard, deciding which areas of ESG reporting to cover, and hiring the remaining board members. Their roles weren’t advertised until January, and the draft climate standard is due to be discussed in the first half of the year. The IFRS Foundation, parent of both boards, has said that the ISSB should start meetings in the second quarter of 2022, “building towards a full complement of members as soon as feasible.”

Consultation, Feedback

What is clear is that sustainability reporting will influence IASB’s own activities and strategic planning. The board launched a consultation last March to cover its 2022-26 strategy. It began discussing the feedback at meetings in November and December as it prepared to finalize its five-year plan. A staff summary of the feedback published at the meetings found a majority of users and preparers of financial statements wanted more guidance on accounting for climate risks, with some asking whether some existing projects should be scrapped or handed over to the ISSB.

There were calls for a long-standing IASB project to rewrite the guidelines for reports’ management commentary to be put on hold until there is more formal cooperation with the sustainability board, or even for it to be handed over to the ISSB entirely. Sustainability reporting will be housed within the management commentary.

The feedback also questioned whether the IASB should step back from other long-standing projects in light of the sustainability drive—a plan, for example, to draw up detailed reporting rules for extractive industries such as mining. “The IASB should focus less on developing a standard for accounting for activities that are expected to decline with the transition to a green economy,” a staff summary of the feedback said.

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