One of the key outcomes from COP26 in Glasgow was the creation of the International Sustainability Standards Board (ISSB) with its mandate of creating a global standard for a whole range of consistent and comparable sustainability-related financial disclosures. In April, the ISSB released its first consultations; one that sets out general sustainability-related disclosure requirements, and the other that specifies climate-related disclosure requirements. The idea is to create sustainability-related disclosures that investors can treat with the same confidence as corporate financial statements. Honeytree supports this work and has submitted a letter to the ISSB saying so.
It is too early to know if key jurisdictions like the EU, the US and Canada will incorporate these standards into policy and rulemaking, but it is notable that the International Organization of Securities Commissions (IOSCO), the international body that brings together the world's securities regulators, is reviewing the proposals, with the objective of endorsing them for use by its 140 member jurisdictions.
General Sustainability Standards
The standards aren’t without some controversy. They are very tightly focused on issues that are “financially material” and are thus, debatably, not sufficiently concerned with how a company’s activities affect broader environmental and social issues. However, these standards could serve as a building block for other standards that go beyond strict considerations of financial materiality. The EU’s Corporate Sustainability Reporting Directive (CSRD), for example, is a whole other set of sustainability reporting standards and it is using the framework of “double-materiality” which considers not just how certain sustainability issues materially affect companies, but also how companies’ sustainability practices impact people and the environment.
While the European standard is more consistent with the Honeytree view that a company’s financial sustainability is interdependent with the sustainability of the planet and societies, we do believe that the two standards can coexist, and be mutually supportive.
The ISSB climate-related disclosure standards notably call for reporting all emissions, including Scope 1, Scope 2, and Scope 3 emissions. Scope 3 emissions are important as they are the indirect emissions along the whole value chain from suppliers and customers and the end use of products. This is in line with the SEC consultation on climate disclosure that also requires reporting of material Scope 3 emissions. However, the ISSB proposals suggest that firms can opt out of Scope 3 reporting if it just isn’t possible to deliver reliable numbers, and the SEC consultation suggests that companies themselves can determine if Scope 3 emissions are material. To be sure, methodologies for calculating Scope 3 emissions are in the early stages of development.
Canada too is in the midst of consulting on mandatory climate-related reporting, and it is the odd-one out. With respect to emissions reporting, it is consulting on two options: one is giving issuers the “option” to not disclose any GHG emission data if they explain why they are not doing so, and two, is requiring only Scope 1 emissions. Honeytree has also submitted a letter in response to this consultation.
At Honeytree, we are excited to imagine a time when we have consistent, comparable, mandated sustainability disclosures. As global investors, we believe that it will be imperative for the various standard setters to work together to ensure that standards are globally consistent and interoperable. Given the historic opportunity before us, to do anything less will be a failure and would be tantamount to a regulatory failure.