Podcast transcript: How sustainability disclosures are evolving and the prospects for convergence

Bruno Sarda

Hello and welcome to the "EY Sustainability Matters" podcast, and the third episode in our miniseries about ESG disclosures. I'm Bruno Sarda, Climate Change and Sustainability Partner, at Ernst & Young LLP, and your host for this series. In this episode, we'll be looking at the current state of sustainability reporting standards, while also discussing the future of global disclosures and the prospects for convergence across different frameworks into a unified global standard for ESG reporting. The emerging standards we'll discuss today build on the different standards and frameworks that already exist, like the Global Reporting Initiative, or GRI; the Sustainability Accounting Standards Board or SASB; the Carbon Disclosure Project, CDP; the Task Force on Climate-related Financial Disclosuresthe TCFD. Lots of acronyms, but in addition, we'll discuss whether the climate disclosure rules proposed by the US Securities and Exchange Commission, or the Corporate Sustainability Reporting Directive (CSRD) adopted by the European Commission in late 2022 will have a role in either accelerating or potentially, further slowing convergence. And we'll certainly mostly look ahead to the new International Sustainability Standards Board or ISSB, and how that fits into the current environment, and whether it will succeed in providing a consistent sustainability disclosure system and develop a baseline for a new global standard. So, with me today to discuss all of this, I'm delighted to welcome my colleague, Terence Jeyaretnam. Terence is EY Asia-Pacific Climate Change and Sustainability Services (CCaSS) Leader, and is a leading voice in the region advising on sustainability, as well as the societal issues arising from the changing economic and regulatory environment. So, thanks so much for joining me, Terence.

Terence Jeyaretnam

Pleasure, thanks for having me, Bruno. Great to chat.

Sarda

Yeah, yeah. Well, I guess I briefly kind of gave your name and title but, can we start by having you introduce yourself a bit more, saying more about your background and experience, especially as it relates to the space of sustainability disclosures and reporting.

Jeyaretnam

Yeah, love to chat. I'm going to sound old because I am old. I've just gotten past 50. And for 30 years, I've been working in this space, which makes it a long time, given that this space has been only going for about 30 years. So, it's been a long time. Back 30 years ago, when I finished environmental engineering, we didn't have any of these standards. And about five years into my working career, the first of these standards started to emerge. I think the first one was AA1000, which came out in UK looking at accountability within corporations. And then came GRI and some of the other acronyms. But just to converge the standards and my career — it's been primarily in sustainability management accounting and disclosure within the private sector. I have worked in other parts of the economy: government and not-for-profit space, but it's been primarily in that area, and a lot in assurance as well. I now, as you said, work in the Melbourne office as a partner in the same practice that you're in. But I also wear some other hats that are relevant to today's discussion. So, back in the day, I wrote — this would be going back to 20 odd years ago — I wrote the Australian environmental reporting guidance for corporations. And, about when GRI came along (and so that process had input into GRI), I then had some input into SASB when it first emerged. I then became SASB's Australian senior advisor, which then folded into Value Reporting Foundation. So, I was working for Value Reporting Foundation and on the technical readiness working group of the International Sustainability Standards Board. So, I do have close contact with ISSB, and I've also recently been elected into the standards board here, which is called the Auditing and Assurance Standards Board of Australia, which is a government board that endorses Australian assurance standards. So, the reason why I have got on the board and some of the other partners within our practice are on different standards boards in Australia, is because the ISSB standards are coming and we, as standards boards, are getting ready to adopt them. So, they're probably the relevant hats for this discussion.

Sarda

Wow, that's quite a journey. And not just as an observer but certainly as a maker, as they say. So, great to have you part of this conversation. So, maybe where we'll start, you know, I think the ISSB came to be in part to address this, kind of, demand that many voices have been voicing for some time of the need for standardization for convergence among standards. And where, you know, can you speak to this demand and, especially, where is the demand coming from? Who is asking for this?

Jeyaretnam

So, I think, if we take a step back to history and look at standards that have come in other practice areas. So, if we look at economics more broadly, economics is the study of scarcity, and the use of resources and the production of goods and services. Really going to that key word of scarcity. And where ESG has come from is that things have become scarce. And not only have they become scarce, they have become impactful to the point where humans are getting threatened by those impacts. So, parking that to one side, if we then look at accounting standards, we go back to the first, sort of, double-entry bookkeeping system in the 13th and 14th centuries going back to Italy, and so accounting standards have had a long history. Whereas, if we then look at ESG standards, as I said, they weren't around when I finished university. So, it's been a very short time frame, and we're talking about managing companies versus managing the planet. Two very different contexts. So, if we just consider that and pause for a second, the point is that if you don't look after the planet and its resources, economics fails and then business fails. And so, the demand, really, has risen from everyone who wants to keep business going, which is investors, companies, shareholders and stakeholders, who are living and working for businesses. And so, it's been that widespread. I think the demands really converged very quickly, because of the impacts that we're starting to see, particularly in the last five to 10 years. Now, I had the privilege of meeting you, Bruno, in London about six months ago. And we were there when London broke its record for its hottest day ever. And that's happening every month in Australia and every month where you are. We're breaking records all over the place, and I think very quickly regulators and investors have worked out that we can't keep going like this. We have to ensure that all businesses are held into account, and some businesses, we must accept, may fail, you know, in the process. And if that's what the cost to protect what we need to do to do business, that's what it needs to be. Well, that, I guess, is the emergence of the TCFD. TCFD looked at climate risk, a bit like the global financial crisis, and said, well, if this keeps going and we start to have carbon crises all over the world, or extreme weather events all over the world, or both. We might have a systemic collapse of business, which we need to avoid. We, therefore, need to have all businesses starting to account for climate risk. So, to answer your question, convergence is coming because it's come to the point where it needs to happen. The voluntary reporting regime of the past just simply wasn't working to dial back the impacts that we're seeing on climate and nature.

Sarda

Yeah, well first of all, fascinating look back at, you know, how we got here. And, I think, that was a very useful reference to these things that are not necessarily exclusive to ESG, to recognize that this evolution an iteration of approaches is common. And it takes time because of the number of constituents that are involved, and the length of adoption cycles. Those kinds of things. So, based on all your experience with these different systems and frameworks and standards to date and your current involvement now, what do you think the prospects are, in fact, for a kind of converged framework of globally accepted standards that will both serve the needs of business, of their key constituents, and then, more broadly, the planet as you outlined?

Jeyaretnam

I think the prospects are high, at least from the consultations that we are seeing, both from the government here in Australia, but also from the standards bodies. Business is generally accepting that there needs to be proper standards, not voluntary standards. Proper accounting standards. I don't know to what extent that's true across the board, but from what I'm hearing through ISSB, there is consensus for accelerated release of ESG standards. And then for adoption country by country, I think the G7 has supported the ISSB standards for accelerated adoption. I think that's going to be a great start. And if the G7 supports it, we're going to see the rest of the world adopt it pretty quickly, so that business can keep going in terms of trade. I think the standards are going to be released and adopted quickly. I do think that it's not going to be perfect on day one. And I think that needs to be accepted, just given the timeline that has been set for these standards. And I believe the accounting bodies and the ISSB will allow for some phased in processes, so that there can be some mistakes and learnings along the way, which I think is fine. I don't think the next few years is going to be about penalizing companies for not reporting or not getting it right. It needs to be about trying to get it right. And if that's the attitude, I think the chances of convergence are high. We will see some, I think, pushback from the voluntary standards. Just say, well, we still have a place in this. And I agree: I think the GRIs, and so on, do have a place, and for companies that want to look more broadly at their impacts, and want to go further than the mandated accounting ISSB standards. So, I think there is a place for every guidance and standard that's out there. But the mainstay needs to be that all companies start to adopt the IFRS ISSB standards.

Sarda

Yeah, no, for sure. I think that's part of what this voice, or this set of voices, pushing for more convergence, more standardization has been, you know: give us a clearer message of what is it that we must do, and then what are these other things we, maybe we can do on a more voluntary basis. But without, you know, so much disparity that it's hard to choose, based on who is asking. You mentioned, maybe, already some of this, you know, not necessarily entrenchment, but this, kind of, incumbency of some who may want to advocate for the role they play. What other obstacles do you think might get in the way of this kind of rapid development and adoption that you talked about?

Jeyaretnam

I think there is a bit of culture change that's going to have to happen as part of the adoption process because you'd have companies out there that have been reporting for a number of years on GRI. So, for companies to move from a particular guidance to another standard, it may require some culture change. I think the other thing that I'm seeing is symptomatic of how quickly things are moving, which is that executives and board members are starting to grapple with this for the first time. And they're starting to go back in history and starting to get confused about, well, is it GRI? Is it ISSB? And so, I think there is a bit of confusion. I think there is culture change. There is probably some resistance from some of the existing standards guidance providers. A combination of things. But I think it is important that CFOs start to play a role in this, because I think that's the new stakeholder that will have a real voice, because CFOs and finance teams do look after the accounting processes within companies, do look after the auditing and assurance processes. And, ultimately, I believe, if these standards play out the way they're intended to, they're going to look after ESG data as well. And I think it's time for CFOs to cut through the noise and work out what exactly the standards are asking for and work out what they have, what they don't have, and set up the processes afresh, not throwing out everything that they've done before.

Sarda

Yeah, I like that you mention, again, the importance and emergence of the CFO as a key actor in this, which, historically, they have been less so in the life cycle of sustainability reporting in organizations. Because there is often this talk of, you know, the need for comparability, or even the need for investor grade data. Do you see sustainability reporting getting to a stage where it is, maybe, as rigorous and as directly mandated as financial reporting?

Jeyaretnam

I think it's inevitable. And industry by industry, it'll be different. So, if you take a power sector, for example, or one that's working in oceans fishing and having quite a bit of impact on nature, I think it's going to be everything to do with their core business. Whereas some of this, it might be a little bit peripheral. But I think it's inevitable that they'll start to be as important as the financial accounts. I think the other part to it is the B2B business and business wanting supply information. And even if you're not having direct impact, if you're working for some of the impacted sectors, you're going to have to provide that information through to your customers. And so, your information needs to be audited and prepared the same way. So, for both those reasons, I do think widespread, sort of, acceptance that this information is and will become more important is inevitable. We're going to start with climate but if we sort of look back to other factors that have been part of the suite of impactful measures, health and safety has been one. We can go back to a number of companies where there might have been a fatality and all bonuses were cut through executive ranks all throughout the company. So, linking some of the ESG metrics to financial performance has already been done. I think that'll continue to happen and, you know, we're starting to see greenhouse targets linked to remuneration and bonuses and so on. And, you know, if we look at what's to come ISSB has talked about, the next three that they're going to start looking at are biodiversity, human rights and people metrics, which will be diversity and health and safety, and so on, once we have S1 and S2 — the sustainability standard and the climate standard out. And, you know, for some sectors, those other standards will be very critical and for others, they'll be peripheral. But as a combination, I think we'll find it quite important.

Sarda

Yeah, thanks for putting, kind of, a bit more detail, also, behind what is in fact making or the foundation of the ISSB or I-double-S-B, as you call it, with, initially, this S1, S2 standard. So, it's ambitious, for sure. There is a lot to cover, and we like to say sustainability is everybody's business, because, well, it kind of touches everything. What is the timeline for ISSB generally? And you mentioned it was aggressive. Do you think it's realistic?

Jeyaretnam

It is aggressive. I think it needs to be aggressive. Whether it's realistic will depend on how quickly the consultations can be done and how much resources can be put into ISSB to meet the timelines that they've set out. I believe that the timeline is 30 June for S1 and S2. That will then be an international standard ready for consideration by countries. So, country by country, I would say, sometime in FY24 there will be consideration and adoption. Certainly, for Australia, I'd expect to see that the financial year after 30 June this year we would, you know, make quite a bit of progress, in terms of adoption or some sort of phase in of adoption, given the amount of support that we're generally seeing through the consultation processes, and the public nature of some of the feedback that's been received. So, I think it's aggressive. Some companies say to me: "Well, we've been doing this for 20 years. So, for us, it's a competitive advantage. So, the quicker the better because we're ready. We're ready to go." So, we have got extremes. So, it's not all companies, getting concerned about these standards. Some want to see them come out quickly, so that they can demonstrate that they're much more competitive in this space than their counterparts.

Sarda

Yeah, for sure. You mentioned things like financial years, fiscal years, kind of reporting cycles. And it's true, you know. A new standard will have to make its way into a machine, whose gears have been turning for a while and will continue to do so. So, how will the ISSB, or how much the design is aiming to fit into the current sustainability disclosures processes and environment? How does it build on current standards or look to potentially displace but in a graceful way on what is currently being done?

Jeyaretnam

I believe ISSB is trying to fit in. So, if we look at the climate standard on its own, it's really a combination of SASB and TCFD, existing frameworks that have been reasonably widely considered or adopted. And, if you haven't looked at SASB and if you've been doing GRI reporting, and if you've been doing a proper materiality process, you would have mostly done SASB. And so, I think the way that's gone at least says to me that it is building on existing reporting within companies. So that, if you have been a company that's been reporting on greenhouse gas emissions, scope 1, scope 2. Now, scope 3 is another thing, because scope 3 has been included in the climate standard, but hasn't been widely done by industry, you know, much longer than the last few years, when CDPs are pushed, and climate risk pushed the requirements for scope 3. So, scope 3 is going to be a little bit behind, and ISSB has recognized that and said: "We will allow longer time for scope 3 to be reported." But scope 1 and scope 2, I think, build on existing processes. If we leave the climate standard and move to things like biodiversity. Now, TNFD isn't completed yet, and we're going to see ISSB come up with a biodiversity standard. So, in that space, we're going to see a huge requirement for accelerated learning and work to be done within companies to be able to report against a fairly fresh set of thinking globally around how to tackle biodiversity impacts of your company, of your value chain, on what you do. So, I think some standards will build on existing guidance, but others will be fresh thinking and everyone will be in the same boat.

Sarda

Yeah, no, for sure, the implementation of anything is ultimately where the rubber meets the road, as they say. And CDP already declared that, I think, starting in 2024, they'll align with the S2 climate standard for their climate disclosure. And we've talked a little bit about this incumbency of some of these standards. And then, of course, we've seen regulators kind of stepping it up. I mentioned earlier, and in the US, the Securities and Exchange Commission, the financial regulator, proposing a climate disclosure rule. We've seen the adoption by the European Commission of a broad set of standards — the ESRS, as they're known. How will all this fit? How will these things align again in the spirit of convergence?

Jeyaretnam

And we're seeing that more broadly, Bruno. We're seeing a number of jurisdictions talking about and instituting mandatory climate risk reporting. We, obviously, in the human rights space, we've got modern slavery acts all over the place. So, regulators have definitely either stepped in or are stepping into mandating this. I think there will be a nice convergence. I think, if there is accounting standards that are going to report these for companies and provide proper guidance on how this is to be reported, I think regulators will piggyback on that and say, well, here is the standard to follow. And I think that's the beauty of the ISSB being set up: this convergence is happening and accounting standards are being released in this space now, as it becomes quite critical for jurisdictions to manage some of these impacts and stress test some of the business ecosystems, there is going to be accounting standards that help them do that. And so, I hope that there is no duplication here, and that regulators rely on the accounting standards and ISSB suite of standards. If that's the case, all we will then have is some regulation that backs the standards. A bit like punitive action for financial reporting that's fraudulent.

Sarda

Yeah, and I think that's a good point, maybe, to start kind of closing. So, obviously, a reporting standard, a disclosure standard, is fundamentally about, how do you present and provide information. But you made clear in your introductory comments that the what and the how matter, but it's really all about the why. You know, we're doing this because we have very real degradation of ecosystems and the accumulation of greenhouse gases, and those kinds of things that we need to actually address, otherwise it could deter and degrade economic activity, business resilience, those kinds of things. Does the ISSB as a construct, as an emerging standard and framework, do you think it does enough to push forward this idea of performance beyond just a kind of compliance of disclosure?

Jeyaretnam

I don't know whether it's an accounting body's role to push for performance. It will be the role of the stakeholders of the business. Accounting bodies will set the standards to make it consistent for performance to be measured. I think we're going to see lots of interesting things, Bruno, and I'm really looking forward to the next few years of how this is going to play out. So, performance is one thing, and I think, you know, if you sort of look at metrics and how metrics work, and if performance is properly managed within companies. Say, for example, it's linked to sustainable debt, and if you do meet your targets, you get incentivized. Or, if it's linked to executive remuneration, I think that's going to be quite interesting. You don't meet your greenhouse targets, you miss your bonus, for example. I think all of that is going to become really interesting where ESG performance metrics are really linked back to the financial performance. But I think what's also going to be interesting are some of the hidden issues. So, I take, for example, methane as a construct in looking at greenhouse gas emissions. Now, methane only really got, I guess, put on the agenda in COP26. But if we really look at the methane gas, it's much more potent than carbon dioxide. But the other thing that not a lot of people know about, is that its short-term impact on global warming is much higher than carbon dioxide. So, if you're going to do one thing globally to avoid what we're seeing in Auckland right now or what we saw in London when you and I met, it's to take out methane. Now, if every company starts to report this properly and scientists start to work out that the one thing we need to do, a bit like ozone, is to cut methane rapidly, you can start to see some financial performance impacts on organizations that are heavy on methane. So, I think it's going to be really interesting once we start getting into the detail of corporate reporting that's regulated, to start to see some of the areas that probably haven't been touched, but really need to be considered over the next few years, in order to avoid the worst effects of climate change and biodiversity. So, yeah, it's going to be interesting.

Sarda

Well, that was a lot of ground to cover in a short amount of time, but, Terence, I really want to thank you for some brilliant insights and really interesting discussion. For our audience, I hope we've brought some additional clarity into this world of sustainability disclosures and given a glimpse of the future of how this vital area will impact businesses worldwide. So, thank you so much, Terence.

Jeyaretnam

Thanks for having me. Great to chat, Bruno. Catch up soon.

Sarda

Likewise. Yeah, and as I said at the start, this is the third and final episode in our disclosures’ miniseries. You can find previous episodes on ey.com or wherever you get your podcasts, as well as past episodes of "Sustainability Matters". Thanks for listening. If you enjoyed this episode of "Sustainability Matters", we'd love for you to subscribe, and ratings, reviews and comments are also very welcome. And you can also visit ey.com to find a wide range of related and interesting articles on this and many topics that will help put these bigger issues in the context of your business priorities. I look forward to welcoming you on the next episode of "Sustainability Matters." My name is Bruno Sarda. You can find me on LinkedIn and feel free to connect with me there. Thanks so much for listening.