A little anecdote. A few years ago, on a flight from Frankfurt to London, I read an article in the FT according to which the City of London was discussing floating publicly owned properties (forests, lakes, mountain resorts) on the stock exchange.
Specifically, there was talk of the River Thames. As I was due to meet a senior (now former) member from the IFRS Foundation later in the day, I took the article with me and teased him a bit by asking him when the International Accounting Standards Board (IASB) would be expected to issue standards for water quality, because after all, the market value of the River Thames would rise and fall with water quality. The response was somewhat harsh: there would never be anything like that from the IFRS Foundation as long as he had something to say about it.
Times have changed, quite clearly. In 2020, the IFRS Foundation published a consultation on sustainability reporting, asking “the market” whether, and under what circumstances, and in what form, the IFRS Foundation should devote itself to developing standards for sustainability reporting. CRUF participated in the consultation process and submitted a comment letter in response..
The motivation of the IFRS Foundation is timely (although I’ve heard some say it just barely got its act together). Recently, we have witnessed great political efforts to anchor the topic of climate change in the financial markets. And critical discourses in economics and finance have been going on for years as to whether maximum risk-adjusted return should really be the only legitimate criterion for measuring the performance of a company. But most of all, ESG, as sustainability has come to be known in financial markets, has become mainstream. It is no longer esoteric or exotic for a portfolio manager to consider ESG.
Integrating ESG into investment analysis and decision making requires good quality data from corporates. Despite 30 years of the Global Reporting Initiative (GRI), despite the Sustainable Accounting Standards Board (SASB), despite the International Integrated Reporting Council (IIRC), the quality of corporate sustainability information is still not as high as that of financial data. This is because there are currently no hard and rigorous standards for reporting sustainability information.
Benevolently, companies are making the best of it, trying to compensate for the lack of standards that would provide structure and rigor by being creative. Pessimistically, companies use the lack of standards for greenwashing and camouflage to varying degrees. Readers may decide for themselves which they think is more likely. Either way, the IFRS Foundation brings an unbeatable advantage to the table, and that is the constructive feature of the division of labor: on one side, experts define and develop standards, which are endorsed by regulators; on the other side are legislators. Thus, there already exists a structure for regulatory anchoring.
Incidentally, CRUF is in good company with its statement welcoming the IFRS Foundation’s commitment to sustainability reporting. By all accounts, the majority of the more than 500 organizations and institutions that participated in the consultation process expressed similar views. As with many of the IFRS Foundation’s projects, CRUF now offers itself as a discussion partner and representative of user interests in the development of sustainability reporting.
Ralf Frank is Founder and CEO of Morning Sun, a consultancy focused on ESG competencies and repertoires of financial institutions. Prior to this he was Managing Director and Secretary General of DVFA, the German Association of Investment Professionals where he led DVFA’s financial reporting and ESG initiatives and training activities. He has been working in financial markets for almost 20 years.
Disclaimer: The views expressed in the blog are those of the author(s) and do not necessarily represent the views of all CRUF participants. To read more about the CRUF’s views on this and other topics, please visit the comment letters section of the CRUF website.