Global investors sounding alarm bells for climate change and hiking their demand for the voluntary adoption of the International Sustainability Standards Board, or ISSB, Standards to achieve consistency and comparability of sustainability-related disclosures are asking companies to do so. With this demand, some of the world’s largest institutional investors, including BlackRock and Vanguard, are engaged in efforts to promote such standards through proxy voting guidelines, which underscores transparency in ESG practices as increasingly important.
Investor Demand for Uniform, Comparable Data
Today’s increasingly interconnected world economy calls for sustainability-related financial disclosure to support informed decision-making. Investors no longer accept fragmented or inconsistent data. Rather, investors are demanding a unified approach that can enable them to compare, normalize, and analyze sustainability-related risks and opportunities across companies and markets. The ISSB Standards will help establish a global baseline for ESG reporting and address investor demand.
“For sustainability information to be meaningful for investment decisions, risk management processes, and ownership activities across a diversified portfolio it must also be consistent and comparable across companies and over time,” Carine Smith Ihenacho, Chief Governance and Compliance Officer at Norges Bank Investment Management.
It is this context that the IFRS Foundation published its guidance entitled “Voluntarily applying ISSB Standards—A guide for preparers” during New York Climate Week. The document details, step by step, how a company can, regardless of where it operates, voluntarily bring its reporting into alignment with ISSB Standards, even in those jurisdictions where the regulatory requirements for such disclosures remain to be implemented.
A Global Baseline for Disclosures
The ISSB Standards gives a global baseline for the sustainability disclosure, which will allow companies to simplify how they journey through different requirements from different jurisdictions in their sustainability reporting. This would be important to the investors who require transparency in corporate practices about sustainability because this will enable them to measure companies’ performance and compare ESG risks across markets.
Currently, the IFRS Foundation publishes a roadmap for companies to improve their reporting practices to align with ISSB’s new standards. Implementing this would give assurance to companies that not only are sustainability-related disclosures comprehensive, but also comparable to counterpart peers in other parts of the globe.
“The ISSB has brought many existing sustainability frameworks under one umbrella, which will make it easier for companies to simplify their reporting practice streams, said Emmanuel Faber, chair of the ISSB. “This guide on voluntary application is going to help companies navigate this transition and ensure that the sustainability disclosures they provide are really decision-useful financial information at lesser cost.”
This centralization is highly beneficial in today’s diversified reporting landscape, where companies have to comply with the divergent regional regulations and frameworks. By embracing the ISSB Standards, companies can put themselves ahead and be well-positioned for the eventual day when sustainability reporting requirements globally harmonize.
Leaders in Adoption: Investors
Investors are greatly encouraging the voluntary adoption of ISSB Standards. Among these are world’s asset managers: BlackRock, Vanguard, and Capital Group, which start using their proxy voting guidelines to coax companies into reporting in line with ISSB standards. “Transparency and comparability of sustainability data is a precondition for informed decision-making and risk management in the context of ESG,” such investors add.
“Investors are looking for more than compliance, they need clarity and comparability,” said Jonathan Bailey, Global Head of ESG and Impact Investing at Neuberger Berman. “We expect companies to apply ISSB Standards voluntarily in their investor communications. This will ensure that they get high-quality, comparable information that allows us to make informed investment decisions.”
BlackRock, the world’s largest asset manager, has made its way into more sustainable consideration in its investment. Firm proxy voting guidelines encouraged companies to improve disclosures because investors need to understand sustainability risks and how companies are managing them. **Vanguard** has also updated its voting guidelines, with a focus on high-quality disclosures on ESG issues.
This sends an important signal to companies that cannot be ignored: investor demands have to be addressed. Companies that do not provide evident and comparable sustainability-related financial information may invite loss of investor confidence and missed investment opportunities at long term.
ISSB Standards as Competitive Advantage
Aside from satisfying the investor’s request for issuers to create, an early adoption of these ISSB Standards may have tremendous potential value for corporations. Global markets are becoming increasingly competitive; sustainability has become a differentiator for companies seeking capital. Investors have a greater likelihood of supporting those that are transparent and showcase leadership in certain aspects of sustainability practices.
Voluntary adoption of ISSB standards by the issuers will help entities in their industry remain at the forefront of ESG reporting. Through that, they would be able to attain confidence from investors, consumers, and other interested parties that would assure them about their commitment to sustainability, which is more than any legalistic compliance.
The more countries of the world begin to adopt enforceable sustainability disclosure requirements, the more those companies are ahead of the curve that are already on ISSB Standards. Those will stand ready to comply with better handling of future regulations, avoid the costs and the timeliness issues involved with taking on new reporting requirements at the end.
Conclusion: A Step Towards Global Standardization
Global investors are taking the lead in growing demand for consistency and comparability in sustainability reporting. ISSB Standards provide a workable solution for firms in efforts to get their sustainability-related financial disclosures in line with investors’ expectations.
This guide puts forward a roadmap for companies to voluntarily apply the ISSB Standards, even in jurisdictions where there is no regulatory mandate for their adoption. Proactive companies may address the growing demand for transparency and comparability of sustainability data by staying ahead in an increasingly competitive playing field where investment decisions are increasingly driven by ESG factors.
Adoption of ISSB standards promises to present investors with clearer and more consistent data for use in their decision-making processes. Companies will obtain cost-effective means of preparing for the future changes in regulation while strengthening credibility and trust with the very stakeholders that matter the most.
This would be the new standard worldwide as investors do all in their power to promote adoption of the ISSB Standards because that is how businesses and investors would see a more transparent and sustainable future.