When the International Sustainability Standards Board (ISSB) introduced their first two reporting standards, we examined how new mandatory standards could impact your business and your operating model within the finance team. In Australia, the Australian Securities and Investments Commission (ASIC) chairman Joe Longo has described it as the “biggest change to corporate reporting in a generation”.
Other than the mandatory nature, the actual content is more of an evolution than revolution. With the history of voluntary standards, we provided the context - the acronyms, the existing standards - that have led to these two International Financial Reporting Standards (IFRS), frameworks:
Why did the IFRS create the ISSB, what is it aiming to achieve, and what is the opportunity for CFOs and leaders to create value and build new competencies in finance teams?
There are two parts to alignment:
There are ongoing debates on why the ISSB focusses on ‘single’ materiality (the impact to the firm), rather than ‘double’ materiality (the firm’s impact on everything else). In their current configuration S1 & S2, will get boards and management teams thinking structurally about climate, social, and broader environment risks in the same way as financial risks. It remains to be seen if and how the materiality ambit is extended in the future.
Water flows to the lowest point, and capital flows highlight the difference between words and action. A recent UN Report found the world’s fossil fuel producers are planning expansions that would exceed the planet’s carbon budget twice over:
“Governments, in aggregate, still plan to produce more than double the amount of fossil fuels in 2030 than what would be consistent with limiting global warming to 1.5°C. This comes despite 151 national governments having pledged to achieve net-zero emissions and the latest forecasts suggesting that global coal, oil, and gas demand will peak this decade, even without new policies.”
There's many a slip 'twixt the cup and the lip indeed. Only 35% of global emissions are covered by 2050 national net-zero targets, so governments changing their approach to sustainability is critical. Alongside this, investors and creditors must be able to make sustainable capital-allocation decisions. And they can’t do this if they can’t reliably assess an organisation’s climate performance.
Many technologies required for energy transition exist, but only 55% are approaching cost-competitiveness. They need capital. Over half the funding needs are unmet for early technologies, emerging economies, and infrastructure. Cost is particularly challenging in industrial sectors. The transparency required by the IFRS improves consistency and comparability of sustainability reporting along the value chain, allowing better decisions inside and outside the organisation. As Bruce Cartwright, CEO of ICAS put it:
“The reality is that it’s about the impact we’re all having on society and, therefore, taking this information and using it is crucial…if we perceive [sustainability reporting] as an opportunity to drive business behaviour and make a wider impact on society and the environment, it becomes meaningful.”
Climate action has to achieve an outcome - from the creation of international reporting standards to drive behaviours, to the quotidian choice of switching your beef for chicken at lunch today. (100 kg CO2e per 1kg of methane producing beef heard vs 10kg CO2e per 1kg of chicken). Transparency creates feedback loops and incentives for organisations to compare themselves to peers on whether they’re doing enough or going fast enough.
80% of the 1,000 biggest organisations have yet to set 1.5°C science-based targets. It’s crucial that businesses start weighing up risks and opportunities that climate change presents. It provides impetus for action now, not later.
The big shift for large and medium business with the localisation and adoption of IFRS S1 & S2 standards is that they will be mandatory - so you will need to address them. The choice is whether this will be reactive, or an opportunity for value-creation.
In mid-sized organisations with no dedicated sustainability headcount, the responsibility for reporting may often fall to the finance team because they are already responsible for existing financial disclosures. This means new skills including carbon accounting, data analytics, and potentially new cloud tools to support new processes.
Climate leaders and first-movers gain competitive advantage. These include easier talent hiring and retention, higher revenues, cash savings, cheaper financing, less regulatory risk, and higher shareholder returns.
CFOs can help boards strategically transform with new governance capabilities, investment budgets, and creating a green business case. Organisation can often achieve emissions reductions at net-zero cost by firstly achieving savings (for example, through energy efficiency) and then using these savings to fund more capital-intensive decarbonisation initiatives.
If you’d like to learn more, schedule a workshop with Getting to Zero to start preparing for the new standards.
