IFRS Foundation Chair Speaks at CFA Institute Symposium on the Creation of Sustainability Standards Board

KEY MESSAGES

At a recent CFA Institute event, I hosted Erkki Liikanen, Chair of the IFRS Trustees, where he spoke about the efforts of the IFRS Foundation to establish a Sustainability Standards Board (the ISSB). A clip of his remarks at the event are available for replay. 

My take on the key messages from his remarks and our dialogue follow. Broadly, I think Erkki’s remarks represented a realistic assessment of what is possible; the challenge before the IFRS Foundation; its importance to investors; and what the initiative will look like in 10 years.

1. “First Principles” in Establishing the ISSB. Participants learned that the IFRS Foundation has established a few “first principles” in its efforts to establish the ISSB. The initiative will:

• Be investor centric;
• Focus on enterprise value creation;
• Unlikely result in a one-size-fits-all solution for all stakeholders; and
• Aim for a global baseline set of standards that allow for jurisdictional complements.

Interestingly, in the panel following Errki’ s remarks, John Berrigan, Director of the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union, noted that, as it relates to the baseline, the EU will support a global minimum standard but will not feel bound by it. Specifically, he remarked:

We [have been] clear from the beginning that we will support the global minimum standard, the baseline, we will do so, but we will not feel bound by it. We will go beyond it. I say this, because . . . we’re all a fan of global convergence, but for us, at least in this case, it’s not about convergence for convergence sake. The litmus test of what we’re doing is the 2050 targets. We need to put in place something that allows us to reach the 2050 target, and quite frankly, focusing only on climate and only on single materiality, the outside-in risk, is not going to do it for us as far as we can see, for the 2050 target. We also would argue that you need some taxonomy, some classification system, in order for the disclosure regime to work, because otherwise you don’t know exactly what to disclose.

2. Demand Driven: Investors Must Remain a Priority. Erkki highlighted that the call for sustainability standards has been demand driven.

In the Q&A, I highlight that much of the demand for sustainability standards has come from investors and that investor efforts have put the issue of sustainability standards on the IFRS Foundation’s agenda. In fact, in the panel discussion following Erkki’s remarks, Rients Abma, Executive Director of Dutch Investor Organization, Eumedion (the first organization to call for IFRS Foundation engagement on the topic in 2019) spoke to this very issue, noting:

Indeed, Eumedion published a green paper in October 2019 titled, “Towards a Global Standard Setter for Non-Financial Reporting.” . . . We called for the creation of an independent authoritative international sustainability standards. . . . And we thought that the IFRS Foundation would be the most suitable body to establish certain standards.

Because investors have “put this on the agenda,” I asked Erkki how the IFRS Foundation was going to ensure that investors remained a priority. He responded:

This is a very important question. And I must say that when we are learning about the work of the existing standards setters, which are voluntary organizations, and I’ve learnt a lot about their stakeholder consultations, [w]e have been pretty much impressed. So we have also our traditions to our stakeholders consultations, but of course we have not been in the field of sustainability standards, [but] they have been. But I hope when we work together, we learn from each other and we reinforce this practice also in the future. Of course, the question in the end will be what is the balance between the board and stakeholder consultation, but I’m sure that we all learn as we grow.

Investors care deeply about the “how” of the IFRS Foundation’s process as it will drive the “what” of the disclosures investors actually receive. In the subsequent panel, John Streur, CEO of Calvert Research and Investment Management, emphasized this point as important.

It is the perspective of CFA Institute that investors must engage, exercise their voice, and respond to the IFRS Foundation’s consultation document on the “how” of the establishment of the ISSB. Without such advocacy, investors efforts to date may not yield the results they seek.

3. Disclosures as Instruments of Economic Decision Making. One of the most interesting points I thought Erkki made was with respect to the challenging economics of sustainability issues—issues such as dilemma of the commons (in which some have the incentive to consume at the expense of everyone else) and the tragedy of horizons (in which actions today have a payback well beyond a normal time horizon)—that highlight the extensive challenges inherent in coming to an agreement about a way forward on standards for sustainability issues as common objectives of society that rely on shared values.

Erkki rightly highlighted that disclosures and accounting are instruments that are not an end but rather are instrument to facilitate economic decision making around issues of sustainability for investors and policy makers.

Erkki pointed out the challenging economics and noted that the purpose of disclosures is a good one, as it highlights a point many of us forget. That point being that accounting and disclosures are a social, not hard, science. They are instruments we have developed to explain the world to ourselves and to allow us to make value versus values-based decisions. That said, the challenge is that the stakeholders are people (not hard facts) and therefore are fraught with bias and agendas.

4. Challenges to the Success of the ISSB Effort. Because disclosures and accounting are a social science based on human frailties, Erkki rightly highlighted that the greatest challenges to the IFRS Foundation’s effort are human, including “the political will, compromise, flexibility and pragmatism” that will be required from the stakeholders to the process. Stakeholders (i.e., humans) decide what is most important and that there is no “right answer” but rather a negotiated answer. In our view, this is an answer that requires a process in which investors—because of their call for sustainability disclosures—must actively participate to (a) demonstrate their need for useful data, (b) safeguard their efforts and information needs, (c) ensure that other stakeholder’s do not derail their efforts, and (d) ensure that policy makers exhibit the necessary political will.

5. What Does Success Look Like in 10 Years? As a part of the Q&A, I asked Erkki about what he thought success for the ISSB would look like in 10 years. He replied:

10 years ahead . . . it seems like a very short period of time. I realize this because I happened to be at the European Commission in 2001, when the Kyoto Protocol was a big item and the European Commission proposed to endorse IFRS standards. That’s only 20 years ago. Since then, there [has] been a tremendous change. But, the hope is that 10 years from now, we would have this kind of global set of core standards of the building block or baseline. . . . I hope that is the case.

6. How Will the ISSB and IASB Be Integrated in the Future? Erkki noted that many sustainability-related factors are already included in financial statements. I agree with that. But I see the establishment of the ISSB as putting pressure on the “what” and “how” of traditional financial reporting and disclosures standards (i.e., because, in some instances, the call for sustainability standards is really an indication of an antiquated accounting model and inadequate financial statement disclosures). Because of this, I asked Erkki how he thought the ISSB and IASB would be interrelated or integrated in the future—10 years from now. He replied:

I would say that they are both independent, but they are complements. So ISSB in the long term . . . It’s very clear that these sustainability aspects will bring more and more weight. But it’s very important that the methods work together . . . or this kind of cross-fertilization, or interconnection, will be needed. [This] can be easily and efficiently done when they are within the same governance structure, the IFRS.

In addition to the clip of Errki’s remarks above, a full recording of the entire 90-minute keynote and panel, which included investors; key regulators from the European Commission and Brazil; and Janine Guillot, former CEO of Sustainability Accounting Standards Board and current CEO of the Value Reporting Foundation, is available on CFA Institute’s website.

Photo Credit @ Getty Images / metamorworks