Lost in translation: Towards a single language for sustainability reporting

How two initiatives are helping investors navigate the “alphabet soup”

Last week, we brought together three experts on GLF Live to discuss how standards for financial disclosures can help fund the transition to a more sustainable global food system.

Hosted by Nicolette Centofanti, general manager of the Luxembourg Sustainable Finance Initiative (LSFI), the live-streamed conversation brought together David Craig, co-chair of the Taskforce for Nature-related Financial Disclosures (TNFD) and Jingdong Hua, vice-chair of the International Sustainability Standards Board (ISSB), to examine why – and how – we need to develop a unified language around sustainability standards.

This excerpt has been edited for length and clarity.

What are the TNFD and ISSB? What are their main objectives, and what should investors be ready for?

David Craig: The TNFD is a market-led task force with about 1,100 members and a core design team. We’re creating a risk management and disclosures framework to allow financial investors to make decisions based on nature-related risks and opportunities.

To do that, the framework is applied to corporates that are addressing nature-related risks and opportunities. It assesses them through their location footprint and discloses investor-ready information about where those risks, impacts, dependencies or opportunities might lie.

Financial flows can then be redirected away from things that are harming nature and causing risks in the systems to what we call more nature-positive contributing action.

Jingdong Hua: The ISSB was created at COP26 in Glasgow, with the urgent mandate to introduce a global baseline of sustainability disclosure, to converge the alphabet soup of different standards, and to provide decision-useful information for investors.

We are a sister board of the International Accounting Standards Board under the IFRS Foundation. Our job is first to develop standards for a global baseline of sustainability disclosures, which would then meet the information needs of investors – what we call “decision-useful information.” This would enable preparers or companies to provide comprehensive sustainability information to global capital markets. We also aim to facilitate interoperability with disclosures that are jurisdiction-specific and/or aimed at broader stakeholder groups.

This is an exciting time as we’ve just launched our first two standards, so in a sense, the work has only just begun.

How do the recently released ISSB standards respond to their first objective of “developing standards for a global baseline of sustainability disclosures,” and why is this so important?

Hua: Over the past three decades, investors have gradually and increasingly realized that ESG [environmental, social and governance factors] and sustainability matter in financial decisions. As such, many different frameworks, standards and requirements have been created around the world.

Now, there are so many that we call it “alphabet soup.”

On one hand, they have been very positive, but on the other hand, the many different “languages” now in this space can confuse both investors and prepares.

There is an urgent need to converge that alphabet soup into a single global language of sustainability disclosure, which is what made it possible for the IFRS Foundation to create the ISSB.

We have launched our first two standards: S1 and S2. S1 is a general requirement of how a company should disclose sustainability information that is material to investors. So, if you think of us as a new language, S1 is the grammar, lexicon, and vocabulary of this language. In addition, it also requires a company to look at all material information on sustainability.

S2 focuses on climate. It goes into much more granular detail on how a company should disclose their scope one, two and three emissions. They need to describe their transition risk and their physical risk. They need to carry out scenario analysis, resilience assessment, and so on.

Now that we have finished these first two standards, which will become effective on 1 January 2024, we have started the public consultation for the next set of possible standards, including in biodiversity and nature.

What dimensions will be covered by the TNFD framework?

Craig: The framework takes a comprehensive view of nature and biodiversity, including climate. We modeled ourselves on the incredibly successful Task Force on Climate-Related Financial Disclosures (TCFD) because companies and financial institutions are very familiar with it, and we wanted to build on climate but incorporate a holistic view of nature.

When we started two years ago, we created a model using all of the scientific research and models that were out there and included four realms: atmosphere, freshwater, oceans and land. The four realms break down into specific biomes that allow companies and investors to really understand their business footprint, their portfolios and exactly where they’re interfacing with nature. It helps them understand where they depend on ecosystem services like the provision of freshwater or pollination, and where they have impacts on nature, either negative or positive. Those translate into risks – or, in fact, opportunities – to the business or investment.

We talk about DIRO: dependencies, impacts, risks and opportunities, covering four complete realms of the natural planet.

The ISSB develops sustainability standards focused on the needs of financial markets and investors, but what does this mean in practice?

Hua: For all material information related to sustainability, you need to look at the governance, strategy, risks and opportunities. The ISSB standards provide this architectural approach. S1 and S2 represent the latest consensus of what should be disclosed as a sustainability matter, both on climate, but also more generally.

We are also starting to support jurisdictions in adoption and will work on a set of guidances, including creating an adoption roadmap with a transition implementation group and inviting stakeholders to give us feedback as they start to implement our standard. We are also creating a knowledge hub, which will be populated with webinars, presentations, etc., that will help companies to walk that journey for adoption.

How do you envision the ISSB and TNFD frameworks working together?

Craig: Our goal for the TNFD is integration into the ISSB global baseline, so it becomes embodied in global standards applicable worldwide and through different jurisdictions as well.

We are working closely with the ISSB to ensure that what we’re creating as a market approach is consistent and aligned with their future direction to this global baseline. We’re slightly ahead in terms of timing because we’re pushing the barriers of understanding nature and it’s a complex topic.

It’s very much a work in progress, but it’s great news that our teams are working together so that we try and make this as practical and simple for the world’s global financial markets as we possibly can.

There are a variety of voluntary sustainability standards available today – at least 20. How would you advise investors who are using them now that the ISSB standards are available?

Hua: Our standards were not created out of a vacuum. In converging that “alphabet soup,” we made an effort to take the best of existing voluntary standards.

To fully achieve that convergence, there is a journey that needs to be traveled. Having to use several hundred different sustainability requirements is a big burden for companies. Meanwhile, investors wonder how to compare disclosures from one country to another, because even if they use the same framework, there are very different “dialects” of the same language.

We would like to see a day when we all speak the same language through convergence, but you cannot expect to speak perfectly on day one. It’s a process.

That’s why our standard has built-in recognition relief to make sure you can start that journey with confidence. A high-quality global baseline with built-in flexibility to accommodate different stages of readiness by big companies, smaller companies or from an advanced country to a developing country.

Robust standards for sustainability disclosure could also help highlight opportunities for investors. Would you agree? How might this look?

Hua: Yes, definitely. The ISSB standards help a company to look at its business model, its relationship with society, the economy, and the natural environment in a holistic way. This more comprehensive view of a company’s financial future, through a sustainability lens, will enhance a company’s ability to make correct business decisions and give investors a richer set of information for them to discern both risks and opportunities.

For example, transition risk is how a company would cope and practically manage the transition to comply with their country’s Paris-aligned commitments or other commitments. Investors could see that a company has a more proactive plan, which could help that company gain a competitive edge, so there might be alpha generation opportunities.

Craig: You have to look at risks and opportunities. We should think about this too, about building resilience at a time when many of the climate changes that were predicted are happening and happening faster than we thought and to more extremes than we thought.

Building resilience into business models is becoming incredibly important, and as we see nature degradation and impact also happening very quickly, that resilience is important. But on the opportunity side, because companies and investors will have to transition away from things that are degrading the natural environment, they will look for areas such as plant-based meats, plant-based packaging, alternative farming, regenerative farming, alternative chemicals, and water reduction.

There is a whole stack of new technologies, methods and approaches which will become opportunities to invest in. I think people are very focused on resilience, but they’re also looking at the opportunity side, as well as specific areas where they can invest in transitions.

It’s like renewable energy 10 years ago: look at where solar and wind is now. Those are the kind of opportunities that we’re going to see in nature. But I think we’re actually going to see them on a larger scale even than we’ve seen in the energy market.

How can your standards work together to achieve a sustainable food system?

Hua: As a standard maker, our approach to sustainability is to let companies disclose what they are doing without policy bias. It is up to investors to determine where they want to invest. So, from this point of view, our approach is slightly different than TNFD in terms of what to address.

As a neutral standard maker, our job is to reflect market demand – investor and preparer demand – for better disclosure, and food is an integral part of it, but we need to be informed on how exactly that will look in our future standard.

Craig: I think what the TNFD will do is bring transparency to the nature dependencies and impacts around agriculture. We’ve got many agricultural firms in our task force and have published agriculture and food system guidance. Of course, when you go back to the Global Biodiversity Framework, it says the number-one cause of nature loss and biodiversity loss is land use change.

A lot of it is caused by food systems, either because we’re cutting down forests to create feed or to graze and farm the animals. So, this transparency about what’s happening is going to reach the investors, and they’re going to ask: “How do I invest in a food system that doesn’t involve land use, the overuse of fertilizers, or overdependence on water?” And they’ll start looking for alternatives.

When you look at the numbers, cattle beef is an obvious area that is very land-intensive, water-intensive and feed-intensive. So, I think investors will start looking at what are alternatives and what are other areas that can be produced. How do we create different food systems? How do we use regenerative farming?



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