Setting the agenda for sustainable investment

As the recently appointed Vice-Chair of the International Sustainability Standards Board (ISSB), Sue Lloyd will play a key role in paving the way for a “global baseline” for reliable ESG investment criteria. Elaine O’Regan talks to the New Zealand-born former IASB Vice-Chair about what lies ahead in her new role. 

Prior to taking up your role with the ISSB, you were Vice-Chair of the International Accounting Standards Board for six years. Looking back on it, what do you see as your most significant achievements in that role?

Completing the international IFRS Standard for insurance contracts was definitely a high point, and also chairing the IFRS Interpretations Committee from 2017 to 2022, and making it more responsive.

What does your appointment as Vice-Chair of the International Sustainability Standards Board mean to you professionally? How important do you think the work of the ISSB will be, and your role in it?

I see this appointment as a really exciting opportunity for me professionally. Corporate reporting is at a real turning point where we are embracing the need for the broadest set of information about sustainability, risks and opportunities to help investors make informed decisions. I am really excited and honoured to be part of that process.

The ISSB has a pivotal role to play in bringing more comparability and quality to reporting on sustainability risks around the world and building a more efficient system, both for the preparers, providing the information, and also for the investors consuming them.

One of my key roles as Vice-Chair of the Board is to bring to bear the standard-setting approach of the IASB. My technical skills from that world, and my knowledge of financial reporting, will help me to bring that rigor to sustainability reporting for investors.

How will the ISSB’s approach to standard-setting emulate or differ from that of the IASB? How will the two bodies coalesce and work together in the future?

There will be a lot of similarity with the IASB, particularly in relation to due process and the thoroughness in which we approach our work. The ISSB wants to be really inclusive and build on the viewpoints of our stakeholders. We have that in common with the IASB.

Obviously, the subject matter is different. Sustainability is a more nascent area of reporting, so we will have to work more closely with our ecosystem and really work with assurers and specialists in sustainability to build this new infrastructure for reporting.

The ISSB is a sister board to the IASB, and that is great because it means we are part of the same foundation. It gives us the unique ability to sit together and work out the package of information we are asking for to meet investor needs, and to make sure that the reporting and the financial statements fit well together.

When the IFRS talks about the ISSB establishing a “global baseline of sustainability standards” what does this mean, and why is it important for the ESG agenda globally?

When we talk about a global baseline, what we really want to do is establish a set of disclosures that are sufficient to meet the needs of investors—to enable them to understand how sustainability, risks and opportunities affect the value of a company’s shares and its debt. 

We want to provide a ‘set of information’ on companies around the world so that investors can make decisions based on consistent and comparable data. That is really what a global baseline means.

It will happen in practice through a combination of two different mechanisms. One will be adoption or incorporation into the regulation in different countries, so that it becomes part of the mandatory reporting system for jurisdictions, in the same way that the IASB’s accounting standards have been mandated by jurisdictions around the world. 

Complementing this, we expect there to be a lot of voluntary application of the standards, separate to the regulatory element, because this is a good way for preparers to understand what information is relevant to meet investor needs.  

Tell us about the ISSB’s four core pillars – governance, strategy, risk management and metrics. How relevant is each one in the context of your overall mission?

Our overall objective is to make sure that investors have the information they need to understand the effects of sustainability risks and opportunities on enterprise values, share price and the value of a company’s debt. 

Our pillars are the prism we use to gather sustainability information from four different perspectives.

One is how a company governs its risks, and how it is managing those risks and building them into its business strategy.

We also look at the metrics they use to assess where they are now, to set their targets for the future and measure their progress in meeting their targets.

This ‘package of information’ is designed to meet the investor’s needs, and, importantly, it is designed to encourage companies to think about how they govern and manage risks.

How will the work of the ISSB support and help investors in respect of good environmental, social and governance (ESG) practice? What other ‘ESG stakeholders’ will benefit from your work?

We know that there are different parties who are interested in information about sustainability, not just investors. We want to facilitate the provision of information to all of them.

We want to make this an efficient reporting system for public policy purposes and for broader stakeholder groups beyond investors, for example.

One of the aspects that we are focusing on here is what we call the “building block” approach.  

This means that, when we are building our requirements, we have investors’ needs in mind, but we also want to make sure that others can add specific investor requirements onto our disclosures to meet broader needs.

If we can avoid the need to have one set of disclosures for investors and a completely separate set for broader stakeholders, it is more efficient for those preparing the information.

Tell us about the first draft ISSB standards, published in April. What do these draft standards provide for, how is the consultation process progressing and what will the next steps be?

There are two documents. The first is the General Requirements Exposure Draft, which sets out the overarching requirements for what should be provided for in sustainability reporting. 

It asks companies to provide information about all of their significant sustainability risks and opportunities relevant to enterprise value assessment. 

It also sets out some other general ideas—for example, the fact that you should be able to understand how this information relates to the financial statements and the proposal that this information be provided at the same time as the financial statements.

The second document is the Climate Exposure Draft, which sets out what specific disclosures should be provided by a company about climate risks and opportunity. This means that, if a company using the General Requirements Exposure Draft identifies climate risks and opportunities as a “significant” sustainability-related risk and opportunity, they can turn to the Climate Exposure Draft to find out what disclosures to provide. 

That document is asking for information about the physical risks of climate change the company is exposed to—flood risk, for example—but also opportunities arising from climate change.

If a company has developed a product, which may become more popular because of climate change, investors may want to hear about that as much as they would climate-related risk. 

These drafts are out for comment until 29 July, 2022. Once we get the feedback, we will decide what we need to adjust, what we can keep as is, and then we will move on to the final requirements.

How do you foresee the “roadmap” of additional draft standards rolling out beyond these first two? What standards are next on the agenda for consultation and what is the anticipated timeline for their introduction?

Our next step will be to ask our stakeholders what they think we should prioritise after the General Requirements Exposure Draft and Climate Exposure Draft documents are approved. 

We only have so much time, and the same is true for our stakeholders, so it is important to us to ascertain where the greatest needs lie. In other words, it is really up to the stakeholders to decide what we work on next.

How will the International Sustainability Standards Board (ISSB) build on work already carried out by the Task Force on Climate-Related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB)?

Our four core pillars (governance, strategy, risk management and metrics) are taken straight from TCFD recommendations, and they form the backbone of the proposals we have out for comment. 

We have incorporated their structure and the climate disclosures included in the TCFD have been incorporated into our Climate Exposure Draft.

We have built on SASB materials in two ways. Industry-based requirements in the appendix to the Climate Exposure Draft are taken from SASB’s industry-based standards. 

We took the climate-related metrics and included those in the Climate Exposure Draft as part of the mandatory climate disclosures. 

We are asking stakeholders to use SASB guidance to help them meet their disclosure requirements in the General Requirements Exposure Draft up until the time we draft more specific disclosure requirements of our own.

How do you foresee the ISSB working alongside, and collaborating with, other standard-setting and regulatory bodies and initiatives like the Securities and Exchange Commission (SEC) the Global Reporting Initiative (GRI) and European Financial Reporting Advisory Group (EFRAG)?

Having our proposals out for comment at the same time as the SEC and EFRAG proposals means that we have a unique opportunity to compare and contrast these different proposals and bring as much commonality as we can to our requirements. In an ideal world, we want to work together to build this global baseline and ensure as much consistency as possible with the SEC, EFRAG, the Global Reporting Initiative (GRI) and others. 

We have a Working Group tasked with doing so with the US, Europe and also China, Japan and the UK.

We are encouraging our stakeholders to write to the SEC and to let the commission know if they think that the global baseline is important. 

The GRI is also very important and is a really good example of the ‘building block’ process that I described earlier. 

We have a Memorandum of Understanding with GRI. One of our aims is to work together to form a global baseline we both agree on to meet investor needs and to encourage GRI to add the additional pieces of information to meet the broader information needs.