What ISSB standards could mean for sustainability reporting

Intro:
Welcome to CPA Australia's With Interest podcast, bringing you this week's need to know information for businesses and accounting professionals.

Jen Duke:
Hello and welcome to CPA Australia's With Interest podcast. I'm Jennifer Duke, External Affairs Lead at CPA Australia. It's Monday the 8th of August. Record breaking floods, wildfires and heat waves, we've really seen it all over the past few years and it's hardly surprising climate change is yet again at the front of our minds.

Jen Duke:
It's also front of mind for many in the accountancy profession because there is a global push for businesses to increase their disclosures of the environmental risks their operations pose. Now, accountants love a good acronym and today we're going to be referring to one quite a bit. The ISSB or the International Sustainability Standards Board, a draught of their new standards was recently released and welcomed by a raft of accounting and professional organisations, including CPA Australia.

Jen Duke:
These new standards could enforce how businesses present the sustainability or lack thereof to the public. I find this particularly exciting. I'm an ethical investor, I invest in funds and businesses that reduce the effects of climate change or at least take steps not to make it worse. I personally believe that the positive or negative impact companies have on the environment will be reflected in their long-term value, but are these standards actually necessary? Can they help the planet and how might they change how executives approach environmental risks in the first place? Joining me now to deep dive into the issue is CPA Australia's Senior Manager, ESG Policy and Advocacy, Patrick Viljoen. Welcome, Patrick.

Patrick Viljoen:
Thank you, Jen.

Jen Duke:
Patrick, sustainability can mean different things to different people. Firstly, for the sake of clarity, what are the ISSB standards about? What are the aim to measure and is this totally new?

Patrick Viljoen:
Yeah, I think a good starting place is maybe just to reflect on what the ISSB is trying to do. I've taken the wording from their website, but it is to deliver a comprehensive global baseline of sustainability related financial disclosures. A lot of words in there, but basically it provides investors and other capital market participants with information about company sustainability related risks and I think more importantly, also the opportunities to help them make informed decisions. Now, sustainability standards aim to provide a framework for sustainability disclosures and I think importantly, those kind of disclosures need to be robust, comparable and able to stand up to assurance.

Patrick Viljoen:
It's also perhaps important to note that the ISSB did not start their work from scratch. There's a various amount of legacy organisations that have been wrapped up into the ISSB. That includes the International Integrated Reporting Council or the IIRC, the Climate Disclosure Standards Board and the Sustainability Accounting Standards Board or SASB and these individual organisations have done a lot of groundwork over several years to hone their respective frameworks and recommendations to a really high level of rigour. I think where the ISSB is coming from is to, amongst other things seek synergy and then also get alignment between all these various frameworks into one cohesive whole.

Jen Duke:
It sounds like a lot of thought has gone into this.

Patrick Viljoen:
Mm.

Jen Duke:
What types of businesses would be required to report on them? Is it mandatory and when are we expecting all of this to kick off?

Patrick Viljoen:
Yeah, look in the first instance, I think the target audience would admittedly be the bigger end of town and that's particularly given the focus on enterprise value and then also the focus on investors and capital market participants. Now, from an adoption perspective, the ISSB has made it clear that they will not be advocating for mandatory adoption. It is their thought that the decision would be best addressed by the various jurisdictions as to whether they adopt the ISSB as their preferred framework and this is also in recognition of the fact that a lot of countries and a lot of jurisdictions have already moved in this space.

Patrick Viljoen:
With that in mind, we are aware of what's happening in Aotearoa and New Zealand, for example and that's a really good example. I think from a standard set and regulatory perspective, in Australia there's no clear indication at the moment in terms of whether we'll have mandatory adoption, but having said that it's also important to note that larger entities already need to comply with sustainability related disclosure requirements and this is through avenues like the ASX or ASIC, for example.

Patrick Viljoen:
I think in the instance of Australia, if we do go down the avenue of adopting the ISSB standards, it would be prudent for us to have a transition period. That is more so for businesses to familiarise themselves with the practical implications of the standards and also then to allow more importantly for resourcing to happen and be put in place, particularly in the assurance space.

Jen Duke:
As you mentioned, we already have some of this reporting in place.

Patrick Viljoen:
Mm.

Jen Duke:
Why do we need these standards and why are they global? Shouldn't individual countries have their own approach?

Patrick Viljoen:
Yeah, look I think the best way to probably answer this question is to reflect on accounting standards. Now, if we think about international accounting standards, it's really gone a long way in paving the way for financial disclosures to be comparable across reporting entities, but also across jurisdictions. I think sustainability related disclosure should follow a similar approach because what you really want is for your financial disclosures and your sustainability financial related disclosures to actually talk to each other, so more over given the focus on investors for sustainability related disclosures as part of their own investment criteria. Global comparability would support asset allocation and I think it's also important to realise that the reason why we've got this whole global response is issues like climate change is a global issue and given that it requires a coordinated and a joined up approach.

Jen Duke:
One of the first conversations that you and I actually had at CPA Australia was about this exact topic and specifically New Zealand which you mentioned previously. As I understand it, they're an early mover and have already introduced these requirements. Is it a smart move to go sooner rather than later than other countries and not to dig the knife in too much, but shouldn't Australia be a little bit more like New Zealand?

Patrick Viljoen:
Ah, much like asking whether the Wallabies should be playing like the All Blacks. Comparing Australia and New Zealand is always something which is a little bit fraught with danger. That being said, I do have a lot of admiration for the boldness they've shown across the ditch. I think even though New Zealand and moreover the XRB has moved at speed with the structuring of their own suite of sustainability reported standards, these have by and large been based on existing work. Things like the Taskforce for Climate Related Financial Disclosures or the TCFD and I think it's therefore probable that the XRB requirements would be able to work in an interoperable fashion with the ISSB.

Patrick Viljoen:
The ISSB does tend to highlight this quite a bit, is the interoperability of their standards with the requirements in various jurisdictions, so this is particularly important, I think if you have organisations that have, for example multinational operations. Organisations that operate in Australia, New Zealand but also may have operations in the United States and Europe, for example where there might be different requirements and for all of that to work together specifically if you think about things like aggregation and consolidation.

Jen Duke:
I think I share your admiration for New Zealand's approach, but there has been some commentary that these standards are at risk of being rushed in Australia.

Patrick Viljoen:
Mm.

Jen Duke:
Is this a legitimate concern and why are we hearing that? How can we balance the fears of these companies and the need to get these standards up to scratch?

Patrick Viljoen:
Yeah, I know it's a valid concern but I think we need to acknowledge that Australian organisations are already reporting on sustainability related considerations and interestingly, according to iFact, the majority of such reporting takes a form of a standalone report, iFACT also indicated that round about 56% of entities within Australia seek assurance at the moment on those particular disclosures.

Patrick Viljoen:
Again, as I mentioned earlier, we're definitely not starting from scratch here. What would be more important is how to ensure that preparers understand the requirements of the ISSB, that kind of nitty-gritty. If we ultimately do go down that avenue and how we're able to build on their existing work, so it's not saying that you have to chuck everything up and start from scratch. That's not what we're saying, but it's how you leverage from the work that you're doing at the moment to make sure that you comply with the ISSB, if that is a preferred route.

Patrick Viljoen:
As part of our joint submission to the ISSBB, the joint submission between CPR Australia and Cairns, we also raise the concern around transition arrangements and I think in that particular regard, we'll work quite closely with the Australian Accounting Signage Board or the AASB around this particular critical piece of work.

Jen Duke:
Patrick, I want to spend the next few minutes talking about what this new frontier of reporting truly means for environmental outcomes. The Australian Government recently released the State of the Environment Report, which painted a dire picture of Australia's biodiversity with many ecosystems on the verge of collapse. Climate change concerns continue to ramp up and we're seeing increasingly extreme weather events globally, but any time there's a mention of sustainability, I'm immediately concerned about greenwashing.

Patrick Viljoen:
Mm.

Jen Duke:
Can these standards help offset my concerns as an investor and a member of the public and how exactly do they provide assurance?

Patrick Viljoen:
Yeah, look that's a particularly grim piece of reading, but I also think it gives us a very clear understanding of where we're at. I think given the amount of scrutiny being placed on organisations and this is from a plethora of stakeholders. Evidencing a genuine commitment to doing the right thing will only increase over duration and time. I think the issue of greenwashing will potentially be addressed by both the granularity of the disclosure requirements that the ISSB is contemplating in the new standards, but then also secondly, there's an increased requirement for assurance and in some instances that is a mandatory requirement, particularly if we look at New Zealand again. That would make it harder for some statements without associated substance, so it's no longer good enough for you just to say something for the sake of saying it, that will be tested in terms of what the underlying substance of that particular statement is.

Patrick Viljoen:
Now, this is by no means in any given way, shape or form an indication that the system is perfect. I think that would be very naive, but businesses are being increasingly held to account and particularly on how they're reacting and changing to a range of sustainability related dimensions. I think the ISSB standards now add that particular level of detail on what that would look like in practise and that's quite heartening for me.

Jen Duke:
I'm pretty proud that CPA Australia has been on the front foot when it comes to integrated reporting. In fact, we recently won an award for it, which brings non-financial capital into annual report disclosures including environmental capital. Is this part of these new sustainability standards? How does it differ and what does a future look like with both of these things?

Patrick Viljoen:
Yeah, look we did indeed when a reward for our integrated report, so go team. Look, the IRRC has been subsumed within the ISSB, so that legacy organisation no longer exists, however that by no means in the case that integrated reporting has any less value than it did before. Reading through what the ISSB has put out, I think the intent is for the ISSB to use all of the assets to its disposal and that includes integrated reporting to provide its global baseline for sustainability related financial disclosures.

Patrick Viljoen:
I'm also aware that the integrated reporting or that integrated reporting will be reviewed and could potentially be adapted to fit better into the larger piece of work that the ISSB is contemplating, so I think it doesn't mean that integrated reporting will just be pushed to the sideline. I think it just will then form part of this bigger piece that we're looking at and to provide a baseline for how integrated thinking for example, can be involved in terms of how we drive forward this agenda.

Jen Duke:
Definitely. Every company is different, can these new standards result in tangible improvements to how executives approach their environmental impact and tackle climate related risks? Ultimately, what I'm asking you is will this actually help the fight against climate change?

Patrick Viljoen:
Yeah, I suspect that if we strip everything away, so forget about the standards, forget about everything else. Ultimately the key to successful organisations is realising that sustainability and competitive advantage are becoming increasingly inextricably linked, so it's perhaps important to note that we don't follow the approach where standards dictate strategic planning. It's actually quite the opposite.

Patrick Viljoen:
Standards provide a way for an organisation to articulate the agility of their strategies and the resilience of their business models to a range of sustainability related considerations, so standards in isolation won't actually heal the multitude of issues that we see emerging, but if organisations fundamentally adapt the way they do business, the standards then provide a robust and comparable and verifiable way of articulating that story, so I think it will become increasingly important for organisations to critically rethink how they do business and to have that as part of your DNA because I think in the absence of that, it becomes a tick box exercise and when you try to articulate that story, it's A, going to be very difficult and B, people will see through that very quickly.

Jen Duke:
This all sounds really great, but it does seem like a lot of extra work for companies and auditors. Everywhere, I look in the news right now, I'm hearing there's a talent shortage, so can we practically pull this off and does the industry need more support to ensure we have enough people with these skills?

Patrick Viljoen:
Yeah, look I think from my personal perspective, capability and the upskilling of members is of key importance here and that this is something I really have concerns about, but as I mentioned earlier a range of organisations are already reporting on sustainability related considerations.

Patrick Viljoen:
Thinking about the assurance side of it, auditors have been placing assurance on non-financial information for many, many years. Again, we're not coming from a very low base. I think, however the devil will definitely be in the detail, so the nitty-gritty of what the standards would require. One key issue, for example scenario analysis for climate change and what that actually means. It's one thing to say that you've got a number. I think we are not trying to have accountants act as climate change specialists or scientists.

Patrick Viljoen:
What we are wanting to have is a situation where you get a number to understand whether that's a good number or a bad number, but also how do you extrapolate that into a trajectory? The baseline is not the issue, it's how you get to the future of where you want to be and articulating that particular story.

Patrick Viljoen:
Upskilling would be key and I think this is where professional bodies would be under pressure, but it also provides us with a really good opportunity to use our own professional development mechanisms to deliver that level of support. Now, you mentioned the skills shortage and there's a lot of talk about immigration.

Patrick Viljoen:
In my mind, immigration will only address some of the problem because when we talk about the skills shortage, this is not something that's unique to Australia, this is a global issue. There's a global shortage in terms of experts that can step up into this particular piece and I think that's a much bigger problem.

Jen Duke:
Definitely. As I mentioned at the beginning of the podcast, I invest ethically and obviously that means different things to different people. Do you think that these sustainability standards will change over time to reflect the updates in science?

Patrick Viljoen:
Yeah, look I think standards need to strike that balance between being robust on the one side and then also being contemporary on the other and that's a very difficult balance to strike sometimes, but I think the range of sustainability related conservations that the ISSB will use to draught their future standards, that hasn't been set yet.

Patrick Viljoen:
They've done two, they've done the first or [inaudible 00:16:16] S1 and that looks in terms of more broadly what kind of requirements we should have for sustainability related financial disclosures, not going into specific details, but then you've got S2, which looks at, for example climate change and there will be an S3 and an S4 and so on and so forth because sustainability is quite a big field to look at, but I do suspect that where the science changes, so say for example looking at climate change, if climate change does accelerate and this is something we do not want and where a two degree baseline, for example becomes a little bit more neither here nor there, again really not the ideal situation.

Patrick Viljoen:
The standards will be able to flex towards that because the underlying science that we use, that's open in terms of adjustment, but the standards in and of themselves will still provide you with that avenue to recognise, to measure and to report for that particular change, so I think they're robust enough to deal with whatever change happens within the science.

Jen Duke:
What might this mean for companies run by those who don't believe in climate change?

Patrick Viljoen:
Look, I think as I mentioned before from competitive advantage perspectives, organisations ignore climate change at their own peril. There is an increased pressure from society, from regulators, from standard centres, from providers of capital and from governance for businesses to not only change the way that they operate, but to evidence that change through the reporting. I think that as a business you'll find it very difficult to navigate the world where the rules are fundamentally changing and look, I think I would also advocate for a focus on opportunities that businesses can gain. There's a lot of focus on risks at the moment and that is really valid, but let's not forget about the fact that there are opportunities that businesses can exploit in this instance.

Patrick Viljoen:
If you can position yourself to have that competitive advantage, why wouldn't you? This is a brave new world, and I think it's something we should be embracing and not be fearful of.

Jen Duke:
I would agree with that. Sustainability to reporting standards of businesses are clearly going to remain a hot button issue in this brave new world. In your opinion, what is the big change in this space that we should expect to see over the next few years?

Patrick Viljoen:
Yeah, look I think the change in leadership at the federal level provides us with such a great opportunity to pursue an ambitious way forward when it comes to aspects such as climate change. Again, reflecting on the situation in New Zealand and oh, they should be paying me for hyping them up so much, but what I would like to see in Australia is a joined up approach that potentially cascades broader sustainability considerations from an overarching policy perspective and this is as set by the Federal Government to the implications for industries and for business.

Patrick Viljoen:
Now, in this regard, the XRB has been particularly good in providing a clear pathway of how things like national determined contributions would result in trajectories for the country, the focus then being on industries and how they determine what the systemic impacts for them would be and then for individual organisations to test their resilience or the resilience of their business models and strategy against those particular impacts that the industry would see.

Patrick Viljoen:
I think if we could design a similar approach in Australia, that would go a long way in not only, A fostering and understanding of how we all contribute to towards a much larger piece of work, but also B, it'll provide clarity and transparency. I think that's something which the Labour Government at the moment is particularly focused on.

Jen Duke:
That's actually a really wonderful positive note after my quite bleak opening to this podcast. It's clearly an evolving situation, but unfortunately that is all we've got time for today. Thank you, Patrick for your thoughts on this complex subject.

Patrick Viljoen:
Thank you very much, Jen.

Jen Duke:
For our listeners, if you've got a question about any of the topics we've discussed today, any of CPA Australia's policy and advocacy work or you'd like to suggest a topic for, With Interest, please email [email protected]. From all of us here at CPA Australia, thanks for listening.

Outro:
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