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Convergence Of Global Sustainability Reporting Standards

Corporate reporting stands as the lesser-known relative within the realm of significant governance issues that attract investor attention. These issues encompass company leadership, strategy, board independence and effectiveness, executive remuneration, and the evolving landscape of sustainability governance.

The spotlight has turned to sustainability reporting, driven by the escalating emphasis on sustainability, marked by significant shifts in 2021 that continue into 2022.

During the March 2022 webinar on Global Sustainability Standards, Convergence, and the Future hosted by the International Corporate Governance Network, it was repeatedly noted that we are currently presented with a rare, possibly once-in-a-lifetime, opportunity to unify sustainability reporting standards.

The overarching aim is to elevate sustainability reporting to the level of financial reporting in terms of quality, consistency, comparability, and usefulness for both companies and investors.

A pivotal moment in 2021 was the establishment of the International Sustainability Standards Board (ISSB) by the International Financial Reporting Standards (IFRS) Foundation, standing alongside the International Accounting Standards Board (IASB).

Concurrently, the merger of key standard setters like the Sustainable Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC) formed the new Value Reporting Foundation (VRF).

Notably, both the VRF and the Carbon Disclosure Standards Board (CDSB) have been integrated into the ISSB.

Beyond the reduction of acronyms, these 2021 developments signify a positive stride toward consolidating global sustainability standards.

This alignment has become increasingly crucial for institutional investors incorporating sustainability, environmental, social, and governance (ESG) data into their investment strategies.

Despite notable progress and promise, sentiments expressed during the ICGN webinar underscore that there is still work to be done, with acknowledged obstacles and challenges on the horizon.

Standard setter convergence, but regulatory fragmentation?

While the tectonic plates of prominent reporting frameworks and standards are converging through the ISSB and VRF, there remains uncertainty about whether, on a different level, regulatory jurisdictions’ tectonic plates may drift apart, potentially settling into distinct groups that mirror diverse perspectives on the company’s role concerning shareholders and stakeholders.

The focus is largely on the European Union (EU), questioning the extent to which its sustainability regulation will align with or diverge from the ISSB’s development and vice versa.

Regarding sustainability standards, the concern lies in how potential conflicts between the two dominant global standards – SASB standards within ISSB and the European-based Global Reporting Initiative (GRI) – might be resolved.

Credit goes to the EU for taking the lead and actively driving initiatives related to sustainable finance.

Key regulatory measures include the Corporate Sustainability Reporting Directive, the Sustainable Finance Disclosure Regulation, the EU Sustainability Taxonomy, and a proposed Directive on Corporate Sustainability Due Diligence.

The EU and its private advisory body, the European Financial Reporting Advisory Group (EFRAG), share the ISSB’s vision of establishing a globally agreed baseline for sustainability reporting and maintaining close engagement.

However, there is uncertainty about whether there is a consensus on what precisely that baseline should entail.

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Potential obstacles or complications include:

Architecture: should sustainability reporting be focussed on the industrial sector (ISSB/SASB approach) or standardized across sectors (GRI approach)?

Materiality: The EU’s focus on double materiality differs from the ISSB’s initial focus on single materiality (as discussed below).

Timing: The EU’s agenda already has momentum, and it is progressing at a faster rate than the ISSB. The development of a new conceptual framework in the financial accounting world can take years, and the ISSB may be under pressure to come together more quickly to keep up, particularly if the EU is to present a possibly conflicting agenda.

As it now stands, the ISSB standards and the GRI standards are emerging as ‘twin pillars’ – and as also potential rivals if this is pitted as one philosophy versus another.

However, it is encouraging that the ISSB is engaging with the EU and EFRAG to establish a coherent global baseline for sustainability reporting compatible with these protagonists’ agendas.

The concerns extend beyond the potential rivalry between ISSB/VRF and EFRAG/GRI; there is also the prospect of a new participant entering the discourse: the United States.

The Biden administration is redirecting attention to sustainability reporting in the U.S., and the U.S. Securities and Exchange Commission (SEC) is currently soliciting input on climate reporting standards for companies listed in the world’s largest stock market.


The increased involvement of the U.S. in the sustainability reporting dialogue is welcomed, yet the trajectory of the SEC’s initiative remains uncertain. Will it chart its own course?

Currently, there are apprehensions that, at worst, this could lead to three incompatible ‘systems’: the ISSB, EU, and the U.S.

Such a scenario would represent a setback for both investors and the broader landscape of sustainability reporting.

Investors are understandably eager to avert regional fragmentation or the Balkanization of sustainability standards, recognizing its challenges to realizing the aspiration of establishing global standards.

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Materiality: single, double, dynamic – is the definition of materiality an obstacle to convergence?

The debate surrounding single versus double materiality has evolved into a philosophical divide for some observers, particularly centered on the question of materiality to whom.

Single materiality concerns how potential ESG factors may financially impact the company itself and its shareholders, whereas double materiality focuses on how the company affects its stakeholders and society more broadly.

The SASB standards, now integrated into the ISSB, initially focused on the U.S. market and embraced the approach of single materiality.

While the ISSB may address double materiality in the future, that is not its starting point. In contrast, the EU emphasizes double materiality and the broader impact on stakeholders.

The GRI, predating the SASB standards, concentrates on all stakeholders, not just shareholders.

The concern arises: are we bound to choose between two or possibly three worldviews in sustainability reporting? Ideally not.

The thesis of single materiality and the potential antithesis of double materiality could arguably find resolution dialectically through the synthesis of ‘dynamic materiality.’

Dynamic materiality suggests that a non-financially material sustainability issue in 2022 could evolve into a clearly financial issue over time, whether in 2022, 2023, 2030, or beyond.

Although a conceptual idea, dynamic materiality is an important tool to bridge potential gaps between the single and double reporting camps.

Many investors, including ICGN, acknowledge the practical challenges the ISSB may encounter as it takes shape.

It is essential for the ISSB to achieve consolidation in single materiality before progressing to the more open-ended and possibly less well-defined perspective of double materiality.

Despite the technical challenges and potential lack of assurance, many investors desire companies and boards to better comprehend the social and environmental impacts of the company within a double/dynamic materiality framework.

While progress has been made, and the journey toward consolidation continues, the destination is not yet reached.

Obstacles and philosophical differences are expected along the way, making it crucial for key regulatory and standard-setting bodies to maintain the vision of a shared global sustainability reporting baseline and coherence between the standards of the EU, the ISSB, and possibly the U.S.

This alignment is what investors are seeking, and likely, companies as well.



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