The author is Chair of the International Sustainability Standards Board
Government action is necessary if we are to combat climate change. However, no single jurisdiction can be successful simply by imposing rules on its local market participants. There should be a global outlook, but multilateral policy making is currently low.
To meet challenges of this magnitude, nations must harness what Gelsomina Vigliotti, vice-president of the European Investment Bank, called the “power and ingenuity” of markets.
Markets are self-generating sources of finance that shape business models and transform economies. When used correctly, they can present a massive solution.
Ahead of November’s COP27 climate talks in Egypt, debate is raging over a $100 billion pledge by developed countries to help poor countries transition to a low-carbon economy.
However, Pascal Lamy, former director-general of the World Trade Organization, has argued that the creation of the International Sustainability Standards Board (ISSB) was “a real success”. Capital markets can trade trillions if properly managed and informed.
But they can only play this important role if they work with high-quality, comparable and consistent information on which investment decisions can be relied.
The ISSB, supported by G20 leaders and other international institutions, is responsible for providing language and developing standards that create a broad global basis for sustainability disclosure for capital markets.
The ISSB has also created forums to offer multilateral solutions – such as a judicial working group bringing together China, the European Union, Japan, the UK and the US – and a specific bilateral dialogue, including the EU. The need for an international orientation is clear.
A recent EU directive states that the bloc’s standards “contribute to the process of convergence of sustainability reporting standards worldwide” and should be integrated into the ISSB global baseline when consistent with EU objectives. .
The goals of the European Green Deal would not be achieved without the use of global capital markets and this requires interoperability between the two approaches.
In contrast, the EU can make a major contribution to the work of the ISSB.
Different approaches to “materiality” – i.e. what should be disclosed – are currently being discussed in the market.
This concept, as used in accounting regulations and capital markets language, should not be ignored. The standards proposed by the ISSB require a company to explicitly disclose information that provides investors with a solid basis for considering consistency issues in their investment and voting decisions.
This information is aligned with the established definition of materiality in accounting standards to ensure completeness and clarity. The definition requires companies to disclose any information that could reasonably be expected to influence an investment decision when it is missing, inaccurate or unclear. Their application requires judgment and regular analysis.
The material that is considered in the area of sustainability is constantly evolving. The term ‘dynamic materiality’ is a recognition that capital markets, policy makers and academic researchers are making rapid progress in assessing the importance of sustainability.
For example, in the standard accounting model, we do not fully consider that enterprise value, a measure of a company’s overall worth, is a function of capital demand and supply, not unlike what investors prefer. The multidimensional nature of sustainability can shed a different light on the nature of these decisions.
This growth is an essential part of our work, because what is important for investors is dynamic and variable. The ISSB’s consultation phase on the first two proposed sustainability disclosure standards has just ended.
The rich feedback we have already received will enable us to create a set of standards that will enable capital markets to become a true ally in the global effort towards sustainable climate change.