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Businesses are now inseparable from a three-letter acronym: ESG, also known as environmental, social and governance. ESG can be viewed as a subset of various non-financial performance indicators that allow for investment valuation, risk assessment and decision-making, particularly focused on three pillars—environmental, social and corporate governance.1 ESG has increasingly gained importance in the framework of an urgent call for action on climate change and other environmental issues aggravated by social effects stemmed from COVID-19. According to Bloomberg, it is estimated that by 2025, investments with high-performing ESG metrics will reach USD 53 trillion, which is more than a third of the USD 140.5 trillion in projected total assets under management.2 The path for high-growth industry will be filled with challenges, including regulation and standardization. Recently, new efforts to address these challenges were discussed at the 26th United Nations (UN) Climate Change Conference of the Parties (COP26).
Over the course of two weeks, approximately 25,000 delegates from 200 countries gathered and were asked to submit their plans to reduce greenhouse gas emissions in a global effort to limit global warming to 1.5 degree celsius.3 The final agreement, the Glasgow Climate Pact, reached at COP26 called upon the private sector, multilateral development banks and other financial institutions to enhance financial mobilization to deliver the scale of resources needed to achieve climate plans, including those included in the 2015 Paris Agreement.4,5 Additionally, outside of COP26, over 3,000 companies have already signed the UN “Race to Zero” campaign, committing to reach net zero emissions across their operations by 2050, highlighting dedication from the private sector to address ESG matters.
As we dive deeper into ESG, we find that choosing ESG-friendly investments is not necessarily easy. One of the main challenges concerning ESG is the lack of standardization, which impairs a comprehensive and even comparative analysis of available ESG investment products. A survey conducted by Kroll in partnership with the International Valuation Standards Council in May 2021 showed that 45% of valuation experts indicated lack of a standardized and a recognized measurement system as the biggest challenges for effective ESG implementation.6 More recently, Kroll’s 2021 Anti-Bribery and Corruption Benchmarking Report found that 62% of the 200 senior risk professionals surveyed in August 2021 stated that the cost of ESG program implementation and the lack of standardization across jurisdictions are the greatest challenges faced.7
Companies are increasingly showing a willingness to implement measures in their missions to address ESG matters; however, they struggle with the wide range of available frameworks, which are usually combined, as they focus on different aspects of ESG.8 The Task Force on Climate-Related Financial Disclosures (TCFD) framework, for example, is supported by the group of the worlds’ seven most influential and advanced economies, the G7, but this frameworks is often criticized for not addressing the social and governance aspects of ESG. Consequently, the development of a global mandatory and standardized ESG reporting framework was among the expectations for the outcomes of COP26.
On November 3, during the Finance Day at COP26, the chairman of the International Financial Reporting Standards Foundation (IFRS) Trustees announced the establishment of the International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of sustainability disclosures for the financial markets: the IFRS Sustainability Disclosure Standards.9,10 He emphasized IFRS’s pivotal role in standardizing accounting principles and that currently more than 140 countries require companies to report using IFRS accounting standards. The ISSB will have a global footprint and will count on the International Monetary Fund (IMF), the Organization for Economic Co-operation and Development (OECD), the World Bank, the United Nations and other experts in an advisory capacity.
Two existing investor-focused international sustainability standard-setters will be consolidated into ISSB by June 2022. They are the Climate Disclosure Standards Board (CDSB), an international consortium of business and environmental nonprofit organizations working towards aligning global mainstream corporate reporting models, and the Value Reporting Foundation (VRF), which offers sets of business and investor-focused frameworks, including the Sustainability Accounting Standards Board (SASB) and the Integrated Reporting.11,12
The ISSB will work closely with the International Accounting Standards Board (IASB) to ensure compatibility with existing financial reporting standards. The technical basis for the work will be by the TCFD, the VRF, the CDSB, the World Economic Forum and the IASB frameworks. Currently, the IFRS trustees are in the process of appointing a chairman and vice-chairman(s) to the ISSB and will appoint a further 14 members to the board.
Ashley Alder, chairman of the International Organization of Securities Commissions (IOSCO), welcomed the initiative by saying that if the ISSB’s future standard meets IOSCO’S expectations, the commission would endorse it to its 130 members to consider ways to adopt, apply or be informed of the standard.13
Indeed, the initiative brings expectations for the private sector seeking ESG opportunities to address issues and keep up with their commitments. Tackling ESG issues will never be possible without the engagement of the private sector. Currently, both well-intentioned and companies forced by the ESG market trend face difficulties in implementing effective ESG measures. Hopefully, the ISSB work and its promising standards universalization will provide the universal guidelines that we lack today.
8For more information on these various frameworks and its challenges, check “Lack of Standardized ESG Reporting System Biggest Threat to Effective ESG Disclosures” (https://www.duffandphelps.com/about-us/news/esg-reporting-system-effective-esg-disclosures)
Complying with anti-money laundering and anti-bribery and corruption regulations.
Establishing policies and programs to prevent fraud and comply with regulations globally.
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