IFRS Foundation throws hat in the ESG ring with a ‘Sustainability Standards Board’

Meanwhile, FRC sees inconsistent voting and stock lending disclosures among investors ahead of new Stewardship Code

The IFRS Foundation has taken what could be seen as an official first step in playing a role in global ESG standard-setting, with the launch of a long-awaited consultation which will test appetite for a new body, the Sustainability Standards Board.

During the last five years, the IFRS Foundation has been facing calls to be more engaged in the sustainability reporting space, as materiality of ESG issues is perceived as potentially overlapping and affecting International Financial Reporting Standards (IFRS). 

A consultation launched today, which coincides with the Foundation’s five-year strategy, will seek views on the creation of the Sustainability Standards Board, a sort of twin body to its International Accounting Standards Board (IASB).

As reported by RI, this option was suggested by Dutch governance Eumedion a year ago, and has been recently endorsed by the International Federation of Accountants, a global trade body for the accountancy profession. 

Institutional investors have also seen the IFRS Foundation and the IASB as a potential umbrella body where voluntary sustainability reporting initiatives and compulsory financial reporting can converge and develop more consistently.   

It comes at a time when the European Financial Reporting Advisory Group, following the mandate of the European Commission, has outlined the roadmap of its preparatory work on potential standards for the EU Non-Financial Reporting Directive’s overhaul. 

Stakes are high for sustainability reporting, as the five main organisations also announced earlier this month that they will be working together to align their initiatives (they are CDP, CDSB, GRI, IIRC and SASB).

Stewardship Code early findings

Meanwhile, an early assessment of how investors would report against the new Stewardship Code introduced a year ago  has found room for improvement in the disclosure of voting records and stock lending policies.

The Financial Reporting Council (FRC), which studied a sample of 21 institutional investors, found that the majority of them fail to include a rationale for all votes cast against management or abstained in corporate elections, as well as disclosure of the proportion of shares voted.

In addition, it found different approaches as to where and when voting records are made public (with frequency ranging from monthly to yearly), “making the comparability of records difficult” the FRC noted. 

The FRC also found that “only a handful” disclosed the approach to stock lending (i.e. if lent, whether it is recalled for voting) and whether clients are allowed direct voting in pooled accounts (a long standing issue raised by the Red Line Voting Initiative). 

Another area for improvement it highlighted is the reporting of how asset owners hold their managers and services providers to account, ensuring there is alignment with their investment and stewardship policy (Principle 8 of the Code).    

“Asset owners provided some details on monitoring external managers, but the reports often focus more on the criteria used for manager selection than the processes of performance review and escalation,” the FRC said. 

Regarding ESG integration, or Principle 7, reporting was “poor” as far addressing the use of service providers or third-party data is concerned. 

The FRC noted: “While some of the reports reviewed mentioned ESG data providers, they tended not to explain the extent to which that data is used or how it interacts with proprietary data or systems. There is also a lack of reporting about how clear and actionable criteria are set for service providers, so that their contributions support integrated stewardship.”

The new Code is effective from 1 January 2020 and interested signatories have to apply for inclusion to the FRC in Q1 2021.

According to the FRC, applicants that meet the reporting expectations of the Code will be listed as signatories in the summer 2021.