Don’t Expect An IFRS Sustainability Reporting Standard Before 2025
The sustainability echo chamber is full of noise caused by statements about ESG and climate change disclosure standards from the International Financial Reporting Standards (IFRS) Foundation. In its most recent announcement on March 22nd, the IFRS Foundation stated its intention to create a working group ‘to accelerate convergence in global sustainability reporting standards focused on enterprise value’. The working group will convene representatives from the complete acronym soup of the sustainability ecosystem as well as observers from the International Organization of Securities Commissions (IOSCO). Why is the IFRS Foundation’s work on ESG and climate change financial reporting standards causing such excitement? Theoretically, it could lead to the definition of an international set of rules that require all listed entities (in jurisdictions which sign up to the new IFRS Standard) to make consistent, comparable and auditable ESG and climate change disclosures. This would embed ESG investment criteria into financial markets and issuer decision-making.
From a consulting spend and IT investment perspective, an IFRS Standard on sustainability disclosures could be a Y2K scale event for sustainability solution providers. How comprehensive will the IFRS Standard for sustainability reporting be? The IFRS has already published a prototype climate-related financial disclosure standard which posits three levels of scope: sustainability disclosures which are already represented as monetary amounts in financial statements; disclosures on sustainability matters that create or erode enterprise value; disclosures on sustainability matters that have significant positive or negative impacts on people, the environment and the economy. The IFRS has consistently stated that it will focus on ‘enterprise value’ which largely rules out the broader scope associated with impacts. The prototype standards contain reporting elements for governance of climate change as it relates to enterprise value, strategy, business model, outlook, risk management and operational metrics and targets. A mandatory TCFD-like climate change financial reporting standard applicable to thousands of listed entities would create a vast climate change consulting market. Commoditized climate change financial reporting projects would uncover significant risks and opportunities, trigger strategic engagements and deeper IT investments.
The big question: ‘When will the standard be applied?’ The answer is not until 2025 at the earliest. To create a new standard, the IFRS Foundation must follow due process. This inconvenient truth is being ignored by many sustainability advocates who focus on the urgent need to act. Firstly, to develop sustainability reporting standards, the IFRS needs to create a new Board which requires a change to its constitution. The aim is to announce the new board in November 2021. Secondly, given how new climate change and ESG disclosures are in the context of financial reporting, the working group will need to undertake wide-ranging fieldwork and stakeholder engagement in 2022. Thirdly, the IFRS will need to publish an exposure draft of the standard which will likely require a comment period of 120 days. Fourthly, the effective date for the applicability of the standard needs to reflect changes to the exposure draft as well as a two-stage translation process. The effective date for new standards is often two years after the finalization of the standard – and can often be delayed. Even if the IFRS sustainability reporting working group powers through all elements of due process and has an agreed standard by the end of 2022, the effective date is unlikely to be before January 1, 2025.