ESG: The IOSCO Approach And Timeline To Disclosure Standards

A firefighter stands next to a line of flames after applying a drip torch to perform a control burn during the Dixie Fire near Taylorsville, California, U.S. (Photographer: David Odisho/Bloomberg)

ESG: The IOSCO Approach And Timeline To Disclosure Standards

Without deep emissions cuts in the coming decades the crucial warming threshold of 2°C will be “exceeded during the 21st century, a recent IPCC report has warned.

The biggest role in cutting emissions will be played by business across the world. Already trillions of dollars are earmarked ESG only – incentivising and pushing corporations everywhere to rise to the challenge of environment, social and governance improvements.

There are many challenges – but the biggest one is of consistent and standardised disclosures. The International Organisation of Securities Commissions is working actively and speedily to address this, says Acting Secretary General Tajinder Singh.

Read the key highlights here.

You can watch the full interview or read the transcript below.

Edited excerpts from the interview.

How is the IOSCO approaching this humongous challenge? What are the key tenets that you are basing your approach on?

Tajinder Singh: This is a very big task globally. Therefore, a key role is to be played, of course by the industry and within industry it is the financial sector that is going to play a key role here. Therefore, in a way I think that kind of connects very well to the IOSCO objectives. So IOSCO or the International Organisation Of Securities Commissions has three objectives;

  • investor protection

  • fair, efficient and transparent markets

  • the reduction of systemic risk

On the one hand you have investors seeking to invest in ESG activities and on the other hand you have issuers seeking finance. Between these two you have intermediaries -- in these you have the financial markets, and where capital markets are engaged, of course securities regulators and therefore IOSCO gets engaged.

There are issues with regard to what is disclosed to investors because so far they've been engaging with financial statements that use accounting standards and what we are now looking to do is to have reporting that is on sustainability disclosure. So that's one area that we are working on.

We have also the other aspect which is about asset managers. As we know there is this demand for these types of products and asset managers are therefore coming out with products for investors. It is important for us to make sure that the investors are protected and that there is proper disclosure from asset managers, and there is no green washing happening there.

The third workstream that we are working on is with regard to ESG ratings and data providers because that is the type of information that investors need to be able to make their investments. So, these are the three big areas that we are engaged.

So far, companies have sought to achieve higher ESG goals on a voluntary basis. If it gets legislated by countries and if every industry has a certain minimum emission reduction threshold or some such to meet, then what role will IOSCO or any of these regulators play?

Tajinder Singh: I think there's a fair bit to unpack here.

Firstly, let me be very clear, IOSCO, or indeed all financial market regulators, what we are really concerned with is enterprise value creation.

So, what type of reporting do you need to do with regard to enterprise value, which is the type of information that investors need when they need to invest in something, the value of a company etc, that is coming from there.

On the other hand, there are other issues that are beyond enterprise value creation. So those are things that can be legislated upon by governments and that's a different area. It's not the same as enterprise value creation but it's not completely diverse either.

What we are seeking to do is to have a mechanism that firstly is focused on enterprise value creation. That is where the regulators are coming together and the type of interactions that we're having are not just with regulators, what we are having and are seeking to have is where there can be an interaction between policymakers and regulators in this broader context.

But I should say that, the global baseline that we are talking about is with regard to enterprise value creation.

What part of ESG is measurable? Governance has been a qualitative feature. Yes it has been reduced to number of independent directors on board or diversity of board etc but broadly still qualitative. E and S are even more challenging.

Tajinder Singh: If you look at the climate aspect of the environment, yes you can measure commitment to net zero by 2050 in terms of the alignment with the Paris agreement. So, you can actually see where people are in terms of how well are they aligned with the Paris Agreement, or the goals that are there for each year. You can measure S in terms of diversity, so how many women sit on the board of a company for instance and G, you already mentioned it. Yes, it is qualitative, but you can also look at things like the differences in voting rights per share class or indeed whether the CEO and Chairman positions are held by the same person.

But it is true — that is where the catch is. The metrics are not evenly established across the different sectors across E, S and G and that is where the work that we are conducting within IOSCO together with other bodies including of course the IFRS Foundation, is. To develop a set of metrics that investors can genuinely rely upon to measure ESG. So, that is something that is forward looking that we will be looking to have.

And you can see that in the work that is going to happen on climate that it will have a set of industry specific metrics — that has not been the case so far.

Where has IOSCO reached with achieving some of this?

Tajinder Singh: What we've done is to actually produce three reports now - the disclosure one that we published towards the end of June. We've also published a report on asset manager disclosures, green washing. We've also produced a consultation report on ESG ratings and data providers.

But let's come to the disclosure issue. I think it's important to see here that what we are seeking to do is to build on past successes.

What we had done say 20 years ago — that was about the establishment of the IFRS, the International Financial Reporting Standards, and specifically the accounting standards. There is an accounting standards board, the IASB - the International Accounting Standards Board. And, 20 years ago there was similar talk about multiplicity, can we get to something that we can have some type of global harmonisation. I would say that process has been successful because there again it was IOSCO’s strong endorsement of the process that actually led to the success of the accounting standards and that IFRS standards are now taken up in 140 countries all over the world.

Sustainability standards and accounting standards are not the same thing. There are certain aspects of sustainability reporting, especially forward-looking elements that are not very easy, but you can use a mechanism that has already worked.

Therefore, the first pillar of what we are doing is to establish an international sustainability standards board or an ISSB, like the IASB that is set up under the IFRS Foundation. The objective of that will be to produce a global baseline with regard to what I was just talking about—enterprise valuation, the information that investors need. There are two aspects, one is that you need to have very strong content to the standard and you need to have very strong governance to the standard. IOSCO is engaged in both of these as we have been engaged on the accounting standards side. That is something that we are doing through technical level work between the IFRS Foundation and IOSCO.

The important thing is, like the accounting standard side where you have a three-tier governance structure, the Accounting Standards Board, then on top of that the trustees of the IFRS that oversee the Accounting Standards Board, but on top of the trustees you have regulators, because you need to make a connection to the public interest, and that is where you have something called a monitoring board, that is chaired by IOSCO. That establishes the connection to the public interest and therefore to trust. Therefore, what we’re saying is let's use the same model on the sustainability disclosure side.

The other (second) thing that we did for the accounting standards was, after the accounting standards were produced or as they were developed, we as IOSCO endorsed the accounting standards and therefore that actually paved the way for the take-up globally. As I said 140 countries. IOSCO will work towards a possible endorsement of the proposed ISSB standards.

The third element is about what we call the running start. You have these voluntary bodies that have come together in the public interest to produce a prototype. That prototype can serve as a running start, rather than reinventing the wheel. Of course we will have to have proper consultations before that becomes an official standard.

The fourth element here is about climate-first. I know we talked about S and G, but even inside E — what we’re saying is let the best not be the enemy of the good. We support a climate-first approach because that is an area where there has been quite a lot of debate and discussion already, and the prototype is there.

I will hasten to add that we see a clear demand for the IFRS Foundation to not just stick to climate but to move quickly into developing standards covering the breadth of ESG issues — on social and on governance. And, I should say that also is not an area where absolutely nothing that has happened. Bodies like the SASB have done some work on the other areas and that again can provide the running start aspect.

Then (fifth element) in terms of how to coordinate with the reporting requirements that countries might have, the legislation point that you were saying earlier.

That's what we’re saying is a building blocks approach. So the work that we are doing is on enterprise value creation, that provides a global baseline. But it is not diverse or disconnected from the other types of reporting requirements.

The prototype that was there on climate last December, what we have set the target for is the COP26 summit in Glasgow in November, ahead of that to have an enhanced prototype that is going to be produced by the IFRS Technical Readiness Working Group. Just to complete the picture, you have the IOSCO TEG, technical experts group, that is working together.

The prototype (from) last year, becomes a refined prototype this year and then can become the basis for the standard as early as the middle of next year.

Just to close it off, I would say we are not going to stop here. Because, going forward the role of auditors is going to be essential -- you need an assurance framework here, and that is becoming already the key focus for IOSCO.

Then with respect to capital market authorities that are our members, we are also looking to see how we can help to provide them technical assistance in terms of enforcement because ultimately all of this will need to be enforced and will need to be supervised.

So that's essentially some of the things that could be doing in this area.

What kind of standard are we talking about? What kind of disclosures are we talking about?

Tajinder Singh: You would have disclosures with regard to governance —what is the role of the board? What is the role of strategy? What is the action plan that companies make for that purpose? And, what are the metrics that companies will be disclosing? I think those are the four pillars of the TCFD (Taskforce On Climate Related Financial Disclosures).

We were talking about emissions, we can also talk about energy consumption or we can talk about climate resilience. What does the company think in terms of the transition risks? What does it see if people are shifting to more sustainable sources like say on energy, then what are the types of risks that exist in these types of transitions? What are the types of physical risks? You can look at the level of effluents - what is the water withdrawal or water discharge happens, what is the water consumption, the management of water is—all of these types of things...

One fear is all this could become too bulky and too difficult for any investor to either understand or compare within peer group companies or compare within industries. When you approach the creation of these standards how are you overcoming this problem?

Tajinder Singh: I think that element, about this not being overwhelming for either side, for the issuers or for the investors, I think is a really important consideration.

I would say therefore, the important point here is that this is not starting from scratch. There are already voluntary frameworks that are being followed and why has that happened? That is because there is a crying need for it from investors, because it is investors who are asking for this information, and therefore issuers are already disclosing information using some of these voluntary frameworks. In fact, what we are seeking to do is to actually reduce the load. Because, what was happening previously was that because you have these multiple frameworks so company is reporting under framework X and then someone else says, well, that's not good enough for me, I want you to report under framework Y. What we are seeking to do is to say let it all come together but let it not come together in a way that becomes impossible for either the issuers or the investors.

So, I would really, truly give comfort to issuers and also investors who have to engage with this information and say that this is something that is already happening. All this will do is to make it come together.

How should issuers prepare in this one year or maybe one and a half years that it takes for these standards to become a reality? For instance in India we already have SEBI that has introduced the new Business Responsibility And Sustainability Reporting requirement, effective next year. What should issuers be doing?

What issues should be doing is to engage with the process that is currently going on. So, there will be a global baseline that is without doubt. Therefore look at things like the prototype, there is a fair chance that that large amount of that might actually become the standard.

But, that's not just on that standard. Issuers can engage with the prototype to see how the presentation standard will look like because it also sets a template for subsequent standards in other S and G areas

There's already been quite a bit of take-up of the TCFD framework. That is a voluntary framework and what I can say is to provide comfort that the final eventual standard is going to be aligned, it is going to be built on the TCFD framework because the TCFD is a part of the alliance framework that is coming together. So, an issuer who is already engaging with the TCFD should find it not very difficult to meet the final standard that is going to come.

I think the last point that I will say is that the issuer should also support the global process that is happening because the harmonisation of requirements is going to be in their own interests as well as it can mitigate the reporting burden in many countries and avoid fragmentation.

So, I think there is quite a bit for the issuers to do - to look at what is going on, the types of public consultations that are going to be out there, the existing frameworks that are there.

If you're already using a framework like the TCFD then I think there is a high degree of comfort that it (the standard) is not going to be completely on a different track from there, or indeed if you've looked at the prototype or other voluntary frameworks. There is a certain degree of comfort that we are seeking to provide by saying this is not going to be just on a clean sheet of paper. So there is quite a bit that the issuers can engage with as they're looking at how the story is going to unfold further.

The second important critical point of view is the raters, right? You’ve spoken about how rating agencies are trying to bring commonalities to the table so that rating shopping doesn't take place. How far are we from some sort of standardisation there?

Tajinder Singh: Let's look at the consultation report that we published on July 26. What we sought to do there is to indeed look at this ecosystem because yes, there are parallels to rating agencies but, his is not exactly what a CRA is used to doing. And you have not only ratings providers but data products providers as well. What we've seen is that there is quite a bit of multiplicity there and you can have also inconsistencies in terms of what comes out.

So what we have sought to do is to have recommendations with regard to some of the basic practices that ESG raters and data product providers should have. Of course, it goes back to the very basics of regulation because what you're seeking to do is to have due diligence in what you do and avoid conflicts of interest in terms of what the other activities are... but there is quite a bit of guidance that raters can also use to be able to get there.

It is important for regulators because many of these are probably beyond the regulatory perimeter.

In many cases the regulators will need to probably go to the legislature, depending upon the country, and say well I need powers to regulate these types of market participants. In some cases, they may want to derive from the existing act. And therefore what we have done is to say that you need to start engaging with this sooner rather than later as a regulator, and if you need those powers, you should go and get them.

That's also signaling to the industry that there is more likely than not going to be regulation in terms of how you provide these types of products.

You spoke of assurance. Are we going to need a whole new class of auditors to be able to achieve this?

Tajinder SIngh: The good news here is that the audit profession is already engaging with this. It is not the same thing as auditing a financial statement. It is different. But the good thing is that there's quite a bit of interaction that we are already having with the profession in terms of how you actually engage, what the specifics are....

Do you expect that the current firms that provide assurance services for financial reporting will also be able to provide services for sustainability reporting?

Tajinder Singh: Yes, I think so. I would not absolutely rule that out because it’s the engagement that I was talking about. There is already interest from those who are doing it on the accounting side to also do it on the sustainability side. So yes, I do see that they should be able to play a role here. That doesn't mean that there is no field for others to come in, but I think that is a role they can play.

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