The author is chairman of the International Sustainability Standards Board
Government intervention is essential if we are to tackle climate change. However, no jurisdiction can succeed by simply imposing rules on its local market participants. There is a need for a global approach, but multilateral policy making is currently at a low ebb.
To tackle challenges of this magnitude, countries must tap into 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 finance that shape business models and transform economies. When deployed properly, they can deliver solutions at scale.
Ahead of the November COP27 climate talks in Egypt, there is discussion about the $100 billion funding pledge made by developed countries to support poorer countries in the transition to a lower-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) is “a real breakthrough”. Capital markets can move trillions if properly guided and informed.
But they can only play this critical role if they work with high-quality, comparable sustainability information that can be relied on when making investment decisions.
The ISSB, supported by G20 leaders and other international institutions, is responsible for providing such language and developing standards that provide a comprehensive global baseline of sustainability information for capital markets.
The ISSB has also created fora to provide multilateral solutions – such as a Jurisdiction Working Group bringing together China, the EU, Japan, the UK and the US – and a dedicated bilateral dialogue, including with the EU. The need for international coordination is clear.
A recent EU directive states that the bloc’s standards “should contribute to the process of convergence of sustainability reporting standards at the global level” and integrate the ISSB’s global baseline if consistent with EU objectives.
The objectives of the European Green Deal will not be achieved without putting global capital markets to work, and this requires interoperability between the two approaches.
Conversely, there is much that the EU can contribute to the work of the ISSB.
Currently, there is a debate in the market about different approaches to ‘materiality’ – in other words, what should be disclosed.
This concept, as it is used in accounting requirements and in the language used in the capital markets, should not be ignored. The standards proposed by the ISSB require a company to disclose clear information that provides investors with a solid foundation to consider sustainability issues when making their investment and voting decisions.
This information will be in accordance with the established definition of materiality in accounting standards, ensuring completeness and clarity. The definition requires companies to disclose any information that could reasonably be expected to influence an investment decision if it were missing, incorrect or obscured. Its application requires judgment and regular analysis.
What is considered material in terms of sustainability is constantly evolving. The term ‘dynamic materiality’ is an acknowledgment that capital markets, policy makers and scientific researchers are making rapid strides in their assessment of the importance of sustainability.
For example, in the standard accounting model, we don’t fully incorporate the fact that enterprise value, the measure of a company’s total value, is a function of the demand and supply of capital and is not independent of investor choices. The multidimensional nature of sustainability could 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 first two sustainability disclosure standards proposed by the ISSB has just ended.
The rich feedback we have already received will enable us to create a set of standards that can enable capital markets to be a true ally in global efforts to bring about a just climate transition.