Pressure is growing on companies to better disclose their ESG activities. Is a reporting standard finally on the horizon?

For all the talk around companies becoming more attuned to environmental, social and governance (ESG) issues, businesses around the world are still doing a poor job of disclosing how they’re incorporating these factors into their operations. A 2021 report from Edelman found 82% of global investors believe companies often exaggerate ESG progress, while nearly three-quarters think companies will fail to live up to their commitments. One of the big hurdles is that there’s no clear single reporting standard—or there wasn’t until March 31, when the International Sustainability Standards Board (ISSB), part of the International Financial Reporting Standards (IFRS) Foundation, released a new set of standards that ISSB vice-chair Sue Lloyd hopes regulators across the globe will adopt and enforce.

Why are companies falling short when it comes to ESG reporting?

With investor and consumer pressure growing on the ESG front, many companies are keen for some sort of reporting standards to guide them. But which ones to follow—the Climate Disclosure Standards Board, the Value Reporting Foundation, the Task Force for Climate-Related Financial Disclosures? Many firms also lack the finance, risk and other expert ise required to report on these issues. “You really need a mix of skills and understanding of different aspects of running a business to bring it all together,” Lloyd says. Then there’s the issue of greenwashing. In January 2021, the European Commission examined the green-related claims of companies across a variety of sectors and found that 42% of environmental claims were exaggerated, false or deceptive.

How will the ISSB’s regulations advance ESG reporting?

While the new standards might fall flat, there’s optimism these rules could see widespread adoption. For one thing, IFRS has a track record—it created the financial accounting rules companies in more than 140 countries follow today. The ISSB, which was formed at the United Nations COP26 climate change conference in November 2021, also has the backing of other standards-developing organizations. In fact, the ISSB rules draw significantly from other documents. “At the request of our stakeholders, we did not start with a clean sheet of paper,” says Lloyd. “It’s building on what’s already there, so it makes it much easier, if you’re already reporting, to use our requirements.” As for what’s included in the ISSB documents—one focuses on climate and the other on social and governance issues—they would require companies to provide an explanation of how they’re governing their ESG practices, their strategies for addressing climate risk and, of course, to come clean on greenhouse gas emissions and other metrics.

Will these or any other standards actually become, well, standard?

Sure, IFRS has been successful in the past, but it took more than a decade for its financial accounting standards to take hold, and its ESG ones face plenty of hurdles. Companies, investors, audit firms, banks and securities regulators are now being asked for input, and Lloyd says the general public will weigh in, too. “We’re expecting quite a lot of feedback,” she says. Then individual securities regulators, such as the U.S. Securities and Exchange Commission and Ontario Securities Commission, will have to decide whether to adopt the standards, too. If they do, companies under their jurisdictions will be forced to comply. Lloyd hopes that investors and governments prod regulators to adopt the standards wholesale. What’s more likely to happen, she says, is a combination of regulation and voluntary application. Ultimately, though, it might not be up to the companies themselves to decide whether to be more forthcoming in their reporting—investors and consumers may well decide for them. “Investors really want to know what the impacts of climate change are going to be and what that business is going to look like in the future,” says Lloyd. “If companies want to attract capital, they’re going to give investors the information they’re interested in.”

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.

Leave a Reply

Your email address will not be published.