The writer is chair of the International Sustainability Standards Board
Government action is essential if we are to tackle climate change. However, no single jurisdiction can succeed by only imposing rules on its local market participants. There must be a global approach but multilateral policymaking is currently at a low ebb.
To address challenges of this magnitude, nations must harness what Gelsomina Vigliotti, vice-president of the European Investment Bank, has called the “power and ingenuity” of markets.
Markets are the self-generating sources of financing that shape business models and transform economies. Properly harnessed, they can deliver solutions at scale.
Ahead of this November’s COP27 climate talks in Egypt there is debate around the $100bn funding commitment made by developed countries to support poorer nations in transitioning to lower carbon economies.
However, Pascal Lamy, former director-general of the World Trade Organization, has argued that the creation of the International Sustainability Standards Board (ISSB) is “a real breakthrough”. Capital markets can move trillions if properly guided and informed.
But they can only play this pivotal role if they operate with high-quality, comparable sustainability information that can be relied upon to make investment decisions.
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The ISSB, supported by G20 leaders and other international institutions, is responsible for providing such language and developing standards that establish a comprehensive global baseline of sustainability disclosures for the capital markets.
The ISSB has also created forums to deliver multilateral solutions — such as a Jurisdictional Working Group that brings together China, the EU, Japan, UK and USA — and specific bilateral dialogue, including with the EU. The need for international alignment is clear.
A recent EU directive states that the bloc’s standards should “contribute to the process of convergence of sustainability reporting standards at global level” and integrate the ISSB’s global baseline if it is consistent with EU objectives.
The objectives of the European Green Deal will not be met without putting global capital markets to work, and this requires interoperability between the two approaches.
Conversely, there is a lot that the EU can contribute to the work of the ISSB.
Currently, there is a debate in the market around different approaches to “materiality” — in other words, what should be disclosed.
This concept, as it is used in accounting requirements and in the language employed in the capital markets, should not be ignored. The standards proposed by the ISSB require a company to clearly disclose information that provides a robust basis for investors to consider sustainability matters in making their investment and voting decisions.
This information will align with the established definition of materiality in accounting standards, ensuring completeness and clarity. The definition requires companies to disclose all information which, if missing, misstated or obscured, could reasonably have been expected to influence an investment decision. Its application requires judgment and regular analysis.
What is considered material in the area of sustainability is constantly evolving. The term “dynamic materiality” is an acknowledgment that capital markets, policymakers and scientific researchers are making rapid advances in their assessment of the importance of sustainability.
In the standard accounting model, for example, we do not fully incorporate the fact that enterprise value, the measure of the total value of a company, is a function of the demand and supply of capital, not disconnected from investors’ choices. The multi-dimensional nature of sustainability might shed a different light on the nature of those choices.
This evolution is a necessary part of our work because what matters to investors is dynamic and changing. The consultation period on the ISSB’s first two proposed sustainability disclosure standards has just finished.
The rich feedback we have already received will allow us to create a set of standards that can enable capital markets to be a true ally of global efforts to deliver a just climate transition.