An industry-led push to boost ESG disclosure has devolved into a confusing “alphabet soup” of standards that is hurting investor efforts to assess corporate progress on climate, according to the chair of the global markets watchdog.
I belong to the school of financial supervisors who don’t have any problem with self-regulation until it doesn’t work anymore,” said Jean-Paul Servais, the newly appointed chair of the International Organization of Securities Commissions, in an interview. “And then we have to switch to something else, maybe another kind of regulation.”
The comments come as Iosco, whose members oversee more than 95pc of the world’s markets, prepares to weigh in on new climate and environmental, social and governance standards being drafted by the International Sustainability Standards Board. ISSB said last week that it expects final versions by the end of June, so the reporting standards can go into effect in 2024.
“The goal is how to avoid an alphabet soup which is currently already the case with some private labels,” Mr Servais said. “The question is how to avoid that with the next generation of public standards, because people are not interested at all in switching from one standard to another.”
Launched in 2021, ISSB operates under the auspices of the IFRS Foundation, whose accounting standards are used in almost 170 countries.
While voluntary, ISSB’s standards are also expected to be widely adopted by governments as a corrective to the current hodgepodge of voluntary frameworks. However, the process could take some years as countries mull the requirements and potentially make adjustments.
Most Iosco members represent emerging markets and may lack data and expertise to fully implement the standards immediately, Mr Servais said. “So we need to be flexible.”
ISSB received more than 1,300 responses to draft proposals last year as investors, companies and industry organisations made their case for how requirements should look. One contentious issue was about the disclosure of greenhouse-gas emissions.
The Financial Stability Board, the international organisation that monitors the global financial system, said climate change is a “key priority” and ISSB standards will make it easier to measure the risk it poses.
Almost two thirds of roughly 17,000 companies recently reviewed by Sustainalytics didn’t disclose emissions from operations and electricity use (scopes 1 and 2), and the rate of non-disclosure climbed to 75pc when including the broader category of value chain emissions (scope 3).
A separate report last week by non-profit CDP found that less than 5pc of companies have 1.5C-aligned targets and disclose the data investors need to verify decarbonisation plans.
“Iosco’s’s voice as a representative of global securities regulators will be important in getting the ISSB’s standards to the finish line,” said Lindsey Stewart, director of investment stewardship research at Morningstar. “The key risk is if institutional investors continue to object to fundamental aspects of the standards, such as the overall reporting objectives or mandatory Sscope 3 reporting.”