How Global Standards Become Local: Using the Sustainability Building Blocks

D

ear Colleagues,

A global system for sustainability-related reporting that results in comparable, decision-useful, and assurable information—for investors, capital markets, and other stakeholders—depends on jurisdiction-specific decisions to use, implement, and enforce standards that the International Sustainability Standards Board (ISSB) intends to develop, starting with climate.

The Building Blocks Approach guidance that IFAC published in May 2021 explains how the global ISSB initiative can fit together with reporting requirements set at the local level. IOSCO’s Sustainability-related Issuer Disclosures report, incorporating our guidance, proposes an indicative timeline for the ongoing work of the IFRS Foundation—pointing to a completed ISSB climate standard by June 2022.

IFAC believes that now is the time for jurisdictions to examine how best to integrate this first ISSB standard, as well as future ISSB sustainability-related reporting requirements, into their corporate reporting infrastructure. This is how ISSB global standards will become local standards—implemented and enforced in jurisdictions around the world.

In order to capitalise on decisive steps being taken by the IFRS Trustees to establish the ISSB and to leverage the benefits of this board’s standard-setting work, our profession—PAOs, firms, and professional accountants in business—must engage with local policymakers to discuss what mechanisms are already in place, or may need to be established, for implementing Block 1 reporting requirements.

Global standards, intended to provide a baseline of investor-focused, decision-useful sustainability information impacting enterprise value are voluntary by nature. Each jurisdiction will need to establish a mechanism to make them enforceable (or effective as guidance). Existing mechanisms for adopting IFRS Standards used in financial reporting may be appropriate or adapted for sustainability-related reporting. Alternatively, a new mechanism may be required.  

Jurisdiction-specific reporting requirements are to be set by local authorities and will not require the same type of mechanism as Block 1. 

How international standards get implemented may differ. The objective is for standards set by the ISSB to be successfully transitioned into local reporting requirements according to criteria that have made uniform use of IFRS Standards a global success for financial reporting in over 140 jurisdictions around the world (see page 2 of our publication, as well as the IFRS website). Endorsement, incorporation, memoranda of understanding, and other pathways can all lead to the global, harmonised system we need for investors, capital markets, and all stakeholders.

However, depending on the path chosen, getting ready to implement the ISSB’s climate-related and subsequent standards can require considerable time and effort. Jurisdictions will want to have in place an appropriate legislative/regulatory framework for using international sustainability standards, a competent regulatory authority (often a securities regulator/IOSCO member), public interest oversight, and engagement in the standard-setting process of the ISSB.

Since our letter on the Building Blocks Approach, we have witnessed important endorsements by the G7 and G20. Canada, Germany, Japan, Switzerland, and the United Kingdom have all expressed interest in hosting the new ISSB. The IIRC and SASB have combined forces and continue to contribute to ongoing work that will evolve the Climate Prototype into a global climate standard. This is all in addition to IOSCO’s continued work and support for the IFRS initiative.

Now is the time: Corporate reporting needs to address climate and other pressing sustainability issues sooner rather than later (see Climate Change Information in the 2021 Reporting Cycle and Feeling the Heat: CEOs Who Ignore Climate Change Do So at Their Own Peril). IFAC urges its member organisations to continue their support for the IFRS initiative, to engage now with local policymakers, and to provide us with feedback on the approach we have outlined here. The journey continues.

Cheers!!

Kevin