The creation of a Global Sustainability Standards Board (SSB) will likely take sustainable finance a step further, putting more effective pressure on companies, so that they too are committed to sustainability planning. And that planet.
The net zero carbon target by 2050 is being adopted by Canada and many countries, as well as a growing number of companies and investors.
The SSB’s mission will be to establish international standards governing disclosure by companies of information of an ESG nature, which is to say related to their actions and their effects on the environment, but also on social and good governance.
A powerful complement to public policies, sustainable finance, which takes into account ESG factors in its capital allocation decisions, is the most fundamental change to occur in the financial system in decades. Better yet, this change is necessary for the common good, unlike other questionable innovations.
But so far, in the absence of comparable data, investors and bankers have struggled to assess companies’ efforts to reduce their carbon footprint and take advantage of the many business opportunities available to them in the transition to a green economy .
The problem stems from the proliferation of organizations offering analytical frameworks, standards and commitments that are incomplete, dispersed, and redundant. In short, a mess of good intentions.
The problem is that companies are eager to show their progress. They do not know where to turn. Worse, confusion allows some to pretend anything.
The SSB was proposed last fall by the IFRS Foundation, which oversees the International Accounting Standards Board (IASB), which sets international accounting standards, with the exception of a few countries, including the United States.
From around the world, around 600 private and public organizations have supported the initiative: institutional investors, regulators, professional organizations, as well as Mark Carney, the UN special envoy for climate action and finance. In Quebec, Cayce de Dépôt, PSP Investments, Jarislavsky Fraser, Edenda, the Auditor General of Quebec and the City of Montreal (jointly with Toronto and Vancouver) have sent letters of support.
The IFRS Foundation will release the operating practices of the SSB in September, with an official announcement at the United Nations Climate Change Conference COP26 to be held in Glasgow in November.
Much remains to be clarified, but it is certain that SSB will not try to reinvigorate the wheel and this will depend exclusively on the work of the five organizations that have already cleared the ground. Two of them deserve special attention: TCFD and SASB.
Several institutional investors, bankers and insurance companies, including Canada’s eight largest public pension funds, have called on companies to adopt the disclosure framework of the Climate Change Financial Reporting Task Force, known by its English brief TCFD.
Created by the Financial Stability Board, which brings regulators and central banks together, TCFD provides a detailed approach to helping companies know how to manage their climate risk. It is set to become an important tool to measure companies’ progress towards carbon neutrality by 2050. New Zealand and the United Kingdom are forcing their companies and other countries may commit to it in Glasgow.
The other framework, strongly recommended by investors, is the Sustainability Accounting Standards Board (SASB), launched 10 years ago at the initiative of financier Michael Bloomberg, and covering a wide range of ESG disciplines with adjusted standards for 77 industrial sectors is.
An important issue to be resolved will be the physicality test, which allows information to be sorted or not based on the size and nature of the business. Is disclosure of information relevant? And above all, to whom is it relevant?
At least initially, we are likely to confine ourselves to the criterion used for financial statements, namely information useful to investors and lenders. However, the government would like to implement additional disclosures to capture the company’s impact on the environment and society more broadly. Already, the European Community demands complete transparency in this regard.
Presenting ESG information in a harmonized manner would be an important step, but not sufficient. According to the International Organization of Securities Commission (IOSCO), of which the Autorité des Marques Financiers are a member, the SSB is promising to build, as international standards establish a “foundation of mandatory disclosures for companies” that will govern Canadians. Needs to be considered seriously.
Along with the financial statements, an independent audit should also be conducted to ensure the veracity of the ESG information disclosed by the firms.
Meanwhile, it is the increasing pressure from large institutional investors that is pushing companies to open their kimono. Those who are now associating themselves with the TCFD approach and adopting SASB standards are moving in the right direction. The standards of SSB will not surprise them.
Better yet, they will eventually gain access to cheaper and more abundant capital, as investors increasingly favor companies that take ESG issues seriously and overcome those who are sleeping.
* Miville Tremblay is also the chairman of the Accounting Standards Oversight Council, which oversees two governance boards responsible for establishing accounting standards for the public and private sectors in Canada. All three organizations support the creation of SSB, but he is speaking here in his personal capacity.
> Read a report on the role of sustainable finance for changes in the carbon neutral economy