New accounting standards that take sustainability and climate impacts into account as well as financial metrics will create a new playing field for companies, according to Emmanuel Faber, former CEO of Danone and partner at Astanor Ventures.
Faber, who is also now the chair of the International Sustainability Standards Board (ISSB), told AFN recently that when companies start reporting on their impact on, and interactions with, social and planetary health, it will feed into how they’re valued by investors, lenders, and consumers and become part of the competitive landscape.
“It’s very clear that the price at which banks will get collateral financing by central banks will rely on the temperature of their portfolio of loans. So, the higher the temperature (the higher climate physical and transition risks), the more risky the portfolio will be, and therefore the lower the credit rating. “Climate change reporting will reshuffle competitive advantage conditions for companies,” Faber told AFN recently.
ISSB was created out of COP26 in Glasgow in 2021 to create a single and enforceable set of standards of environment, social, and governance (ESG) reporting by companies and investors.
ESG has been nicknamed Exaggerating, Scamming, Grifting by many as companies and investors have used a variety of voluntary reporting metrics and indicators to measure their impacts beyond economic performance. Increasing consumer demand for such reporting, on the back of the growing climate crisis as well as social inequity and governance complaints, is being met with greenwashing from businesses using reported ESG credentials as a marketing tool.
In an attempt to overcome the limitations of a fragmented ESG landscape, the G20, The Financial Stability Board, and a range of capital market authorities and governments backed the creation of the ISSB by the International Financial Reporting Standards Foundation – the non-profit that also manages the International Accounting Standards Board (IASB), to create a cost-effective, decision-useful global baseline of sustainability accounting.
How does climate change reporting work?
Faber explained the theory of change in three steps:
- Adoption of language. With multiple metrics and indicators out there, definitions vary widely. The ISSB’s common language will put definitions around straightforward terms such as what is a greenhouse gas emission.
Faber said there are lots of companies ready to adopt ISSB language voluntarily as soon as it’s ready, as their investors are eager to be able to detect climate risks. Faber exampled global non-profit disclosure system provider CDP, which recently announced that all the climate data on their platform (from nearly 20,000 companies, representing half of the global market capitalization) will have to be formatted according to ISSB in 2024.
- Accounting standards/requirements. Companies will start to include ISSB standards as add-ons to their accounting and formal stock exchange disclosures as a means for investors and banks to analyse the inherent risks and resilience of companies.
While Faber expects broad-based mandates from governments and stock exchange regulators in the future, mentioning the potential uptake by the 170-country-strong International Organization of Stock Exchange Commissions, he added that the ISSB has been working with the European Union already, which could integrate ISSB standards into its 2024 disclosure plans around ESG.
- True cost accounting and valuing impact.
ISSB standards could be fully incorporated into companies’ accounting and put a value onto all activities and wider impacts of the business beyond monetary gain, such as its greenhouse gas emissions, impact on biodiversity, consumer health, and more.
Faber exampled a food company that reduces consumer intake of sugar, translating into a reduction of people with diabetes, which typically costs them and/or society $500,000 in their lifetime. Another example is carbon capture. If carbon has a value of $100/ton and a company stores 10 tons of carbon, the value of that would be $1,000. While monetization of these impacts would not be the primary goal for the standards, it could be a side effect and enabled by them.
Not just for publicly-listed companies
ISSB won’t just be relevant and useable for publicly listed, large companies, according to Faber.
“On climate, as with everything else, our standards will have a fairly direct impact on companies that have a distinctive climate agenda (whether positive or negative),” he said. “EU disclosure rules on ESG will apply to companies with revenues of more than €40 million and 250 employees, whether they are private or public.”
Young companies with plans to go public at some point would do well to start thinking about incorporating some of this climate change reporting sooner than later because they will need to provide climate disclosures and historical data to support their IPO or SPAC transactions.
Private markets investors are also engaged with ISSB as they already increasingly use private ESG standards to help prepare their portfolio companies for acquisitions by large strategic — and often listed — companies that also need to consider the climate resilience of new investments. ISSB has recruited the chief sustainability officer and sustainable investment of one of the world’s largest private equity firms, KKR, to join its full-time standard-setting board.
What do you think? Are you preparing to incorporate more climate reporting into your accounting? Let me know: [email protected]