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Standardising standards needs care

While the IFRS’s intention to improve corporate sustainability reporting is laudable, we see a need to proceed with caution.

By Charlotte Lush, Research Manager, Workforce Disclosure Initiative, and Simon Rawson, Director of Corporate Engagement, ShareAction. Read their response to the IFRS's consultation paper on sustainable reporting in full here.

As this unprecedented year comes to an end, the debate around sustainability reporting is heating up. 2020 saw “The Five” big sustainability standard setting organisations commit to closer collaboration and the EU kicked-off a review of its Non-financial Reporting Directive. Potentially the most significant development has come late in the year, as the IFRS Foundation launched a consultation on the accountancy standards body’s own role in sustainability reporting standards.

The importance of corporate sustainability reporting in general and the value of internationally recognised reporting standards is increasingly clear. When formulated effectively, global standards can help to drive progress towards a financial system that better addresses the pressing environmental and social challenges the world faces.

But the debate raises a number of fundamental questions about sustainability reporting. These include the question of focus: a narrow focus on climate, a broader focus on the environment or a comprehensive focus on environmental and social issues; and the question of materiality: a narrow focus on so-called ‘financially material’ issues, or a broader focus on issues that have an impact on companies and/or on the environment and society - so-called ‘double materiality’.

The false dichotomy of materiality

The IFRS consultation proposes that its sustainability standards should, at least initially, focus only on financially material data that is deemed relevant to investors. However, through our work with investors on initiatives such as the Workforce Disclosure Initiative, we know that investors, while far from being a homogenous group, are not solely interested in so-called ‘financially material’ information.

The distinction between issues recognised as financially material and those currently not considered material (but which have a negative impact on people and planet) is misguided. The COVID-19 pandemic has shown how workers’ rights issues, for example, (rarely thought of as financially material) can suddenly become critically important in a public health crisis.

The fallacy of focusing on climate

The IFRS is also proposing to focus solely on climate, but this narrow focus neglects the fact that sustainability issues are interlinked and interdependent. Climate change is already having knock-on effects on biodiversity, for example, while climate mitigation will have significant impacts on workers in high-carbon sectors – hence the need for a ‘just transition’.

Taking a holistic approach to these challenges and recognising that people matter just as much as the planet has mutually reinforcing benefits. In addition to the intrinsic benefits of work that is safe, secure and dignified, promoting decent work results in a happier, more productive and more innovative workforce that is better equipped to enable companies to overcome challenges.

Proceed with caution

While the IFRS’s intention to increase the quality, quantity and comparability of corporate sustainability reporting is laudable, we see a need to proceed with caution.

Sustainability reporting serves to generate data that companies, investors, policymakers and civil society need to tackle sustainability challenges. With such a diverse set of stakeholder interests and such broad and interlinked challenges, global standards must address both the social and environmental impacts that companies have on people and planet, as well as the impacts sustainability issues can have on companies.

However, the reality is that standards on different topics and in different geographic regions will develop at different speeds and to different levels of ambition. This makes it even more important that efforts to develop comprehensive, global standards should not create additional fragmentation in an already crowded ecosystem.

If global standards that don’t truly address all issues and perspectives are perceived as a panacea, this could stifle the development of existing standards to reach the level of ambition we need and lead to the adoption of “lowest common denominator” standards, stymieing regional efforts such as those of the EU.

Rather, such efforts must work closely with established sustainability standard-setters, such as the Global Reporting Initiative (GRI), to ensure that any new standards truly build on and support their work. Established standard-setters are already able to adapt their standards as stakeholders’ data requirements evolve, and many have mechanisms for working with new expert initiatives.

Ultimately, any effort to develop reporting standards must be inclusive of a wide range of stakeholders, including those on the front lines of climate change or labour exploitation. Any legitimate global standard must ultimately be accountable to the people it seeks to protect.

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