LONDON (Project union) – The United Nations Conference on Climate Change (COP26) held this year in Glasgow brought about a marked shift in direction from the responsibilities of governments to the power of the private sector. If national governments fail to reconcile their interests and engage in collective action, can the private sector take over?
It’s not just a question of what difference individual or coordinated corporate emission reductions would make, although the answer is likely to be significant. Rather, it is a question of the potential of the market. Can it be harnessed to deliver the crucial public good of rapid and large-scale emission reductions?
“It remains to be seen whether the market system can be harnessed to deliver the crucial public good of rapid and large-scale emission reduction. But the creation of a new accounting standards board focused on climate-related disclosure certainly improves the odds.“
Lack of financial capital is unlikely to be a problem. Mark Carney, the United Nations special envoy for climate action and finance, caused a stir at the meeting in announce an engagement of $ 130 trillion towards the goal of achieving zero net greenhouse gas emissions. This tempting sum must be provision by the Glasgow Financial Alliance for Net Zero (GFANZ), a Carney-led coalition that includes some 450 financial institutions representing 40% of global assets.
A more important evolution
But this financial commitment raises its share of questions. Most obvious, how will the money be spent? Will the efforts adequately and equitably reflect the interests of the world’s people – consumers, workers, savers and investors?
In considering these issues, we should take note of another, perhaps even more important development at COP26. Erkki Likannen, Chairman of the Board of the Foundation for International Financial Reporting Standards (IFRS), announcement the formation of the International Sustainability Standards Board (ISSB), which will focus first and foremost on climate-related disclosure.
This is a big step forward because, as Peter Drucker said, “what gets measured gets managed”.
“These variables linked to climate and climate policies represent major risks, but without a coherent and complete report, these risks cannot be measured, let alone mitigated.“
Already, the IFRS Foundation publishes financial accounting standards that more than 140 countries require. These standards, which form the basis of countries’ national reporting rules, have over the years become the lingua franca of global financial markets. The reason is simple: Clear standards ensure that information is transparent, comparable and therefore useful for analysts, auditors, investors, lenders, regulators and business leaders.
The discipline of mobile capital
In this sense, the evolution of common reporting standards has been vital for the globalization of capital markets, a trend that has left a growing share of global business enterprises subject to the discipline imposed by the free flow of private capital. And yet, this discipline does not currently extend to climate-related factors.
Businesses are both authors and victims of environmental degradation. They will be affected by the consequences of climate change, such as increasingly frequent and severe extreme weather events, and by government actions to reduce emissions and protect or restore the environment.
Yet, as it stands, we don’t know exactly how much those costs would be – or how much a given company’s activities affect the environment – because there is no common system. to account for the relevant variables. Even from a purely financial point of view, this is a serious problem. These variables linked to climate and climate policies represent major risks, but without a coherent and complete report, these risks cannot be measured, let alone mitigated.
This is where the ISSB comes in. Of course, the mission of this organization is ambitious. It will be global from the start and will provide standards covering an extremely complex set of indicators. Of course, there is no alternative: measuring climate-related risks is not a simple task, and the challenge seems particularly daunting given that current financial reporting standards have evolved over the years. years.
Nonetheless, there are reasons to hope that the ISSB will be up to the task.
The ISSB will set a global ‘benchmark’ of minimum standards that companies must meet in their reporting on climate-related risks. This benchmark will allow investors to compare these risks between companies on a global scale.
The ISSB standards will not establish parameters related to prescriptive public policies, which will most likely be specific to each country. If a country has a specific target or policy in place, it can be added as an additional requirement. The key here is to make sure that the local requirements will not lead to an entirely different reporting structure, but rather be additive.
Bottom-up and top-down approaches
Governance will also be integral to the success of the ISSB.
Experience has shown that too much top-down orientation can delay the development of standards. This is why the IFRS Foundation has put in place a three-tier governance system, comprising a supervisory board made up of representatives of capital markets authorities from around the world, an independent board of directors and the International Accounting Standards. Board (IASB), an independent standards body. National standard setters, multilateral organizations and private companies contribute to the standardization process through several advisory committees.
The ISSB should replicate the global approach of the IFRS Foundation. It will serve as a twin board of the IASB, and the IFRS Foundation expects the new body to cooperate closely with the International Organization of Securities Commissions, an approach that should facilitate local adoption. Additionally, the ISSB will have multiple physical locations around the world.
The creation of the ISSB reflects a new mix of bottom-up and top-down initiatives and the convergence of a wide range of organizations and individuals. This could not have happened without the innovative work of the many actors who understood, long before the topic became mainstream, that capital markets needed sustainability standards. These organizations – the Value Reporting Foundation and the Climate Disclosure Standards Board in particular – defined the first reporting concepts and were partly successful in getting their adoption adopted by companies. The Climate-Related Financial Disclosures Working Group and the World Economic Forum have also contributed important work.
But while these efforts got the ball rolling, they led to a patchwork of standards and measures that confused businesses and perhaps enabled greenwashing. Combining these initiatives into a single common framework required a top-down approach led by a credible authority. Regulators, international organizations and governments have encouraged the IFRS Foundation to take on this role, due to its extensive experience as a financial reporting standard setter.
The creation of the ISSB is exactly what the emergence of climate finance standards needed. And the pragmatic mix of top-down and bottom-up initiatives, as well as the action of a “coalition of the willing,” that made it possible may have enduring significance to the world’s broader efforts to deliver public goods.
Lucrezia Reichlin, former research director at the European Central Bank, is professor of economics at the London Business School and a director of the International Financial Reporting Standards Foundation.
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