Open letter to Mr. Erkki Liikanen, Chair IFRS Foundation trustees

In response to Consultation Paper on Sustainability Reporting

The Hague, 10 December 2020

The importance of a sustainable society has become clear to most people. Businesses are incorporating ESG measures into their policies and procedures, asset managers are establishing criteria for responsible investing in accordance with the UNPRI guidelines and asset owners are influencing companies to incorporate the SDGs as established by the UN Global Compact. A multitude of initiatives have been started to structure sustainability metrics and reporting. Long-term sustainable performance is addressing companies at their heart of existence and is impacting companies’ purpose to serve all stakeholders at large. Clarity on the meaning of and evaluation of sustainable performance is therefore essential in securing the needed change in how companies add value to society. To arrive at the needed transparency and uniformity of metrics, global standards are to be established that clearly describe what is measured, how it is measured and how it is reported. This allows for auditable performance evaluation and monitoring progress towards defined goals.

Reward Value’s mission is to promote the development of remuneration policies that contribute to long-term sustainable and inclusive value creation. The effective integration of sustainability performance in the financial performance and incorporating the integrated measure in the (executive) remuneration policies will stimulate organizations towards sustainable long-term value creation for society at large.

Reward Value is a non-profit research initiative. Reward Value can be reached by email (

1. Introduction

In order to achieve a better and more sustainable future for society and our planet, the Sustainable Development Goals (SDGs) aim to promote changes in the way we produce, consume and live. Continuing in the way we currently use our resources, deal with waste and address societal issues like inequality, will seriously harm societies and the planet in the long term. There is very little doubt about that.

The business and investment communities have a crucial part to play in this transition. Currently however, there is little common understanding in how we define clear targets for corporate behavior, or track progress and measure success for that matter. This requires a global harmonization of how the different elements of sustainability and corporate responsibility are measured and reported. Uniformity allows for comparison between companies and creates transparency allowing share- and stakeholders to hold companies accountable for their actions.

As Reward Value, we believe that global standards for targets and measurement of corporate social behavior and transparent performance assessment can be included in executive compensation design, in order to incentivize and accelerate the dearly needed progress towards a sustainable planet.

2. What is missing?

To really be able to measure progress, uniformity of definitions and metrics is needed. Unlike financial data, sustainability data does not have structured commonly agreed upon principles.

The International Accounting Standards (like IFRS and USGAAP) clearly define the key metrics and describe how these metrics are measured. Taken together with reporting guidelines, this means that stakeholders are able to analyze business performance and compare it to other businesses and sectors.

Such analysis based on common definitions and metrics is not yet possible for sustainability performance. Achieving uniformity in measuring and reporting sustainability performance will make it possible to audit and enforce global goals. Competing reporting standards on ESG, however, dilute clarity on sustainability risks and hinder steps towards a more sustainable society.

3. Existing initiatives

Over the past two decades, many different organizations have developed frameworks and disclosure guidance on ESG (like Climate Disclosure Standards Board Framework, GRI Sustainability Reporting Standards, SASB Accounting Standards, Taskforce on Climate-related Financial Disclosures and many others). In addition, data providers like MSCI, S&P and Sustainalytics have collected a wide range of ESG related data and rate companies on their sustainability performance. The interpretation of the collected data often differs between the data providers and as a result, businesses are rated differently for the same performance.

Sustainability performance measurements, assessments and reporting is highly complex, and a strong cooperation of the different initiatives is dearly needed. September 2020 has proven to be a progressive month with first the announcement of the five global standard-setters (SASB, GRI, IIRC, CDP and CDSB) to join forces. This was followed by the second announcement by the WEF’s International Business Council in cooperation with the Big Four accounting firms to also work towards standardization. Both announcements also included reach outs to each other to build on the existing frameworks and make use of existing knowledge. Finally, the IFRS Foundation issued its consultation around the proposed establishment of the Sustainability Standards Board.

A convergence in the existing, leading initiatives is taking place, but central coordination is crucial to arrive at a uniform set of rules and guidelines

4. The Way Forward

To arrive at uniform standards, the common interests of the different stakeholders are to be addressed. Commercial interests of asset owners, managers and issuers may differ from each other, as well as from the interest of society in general. Realigning these interests requires a uniform yardstick. An independent body needs to be established to develop and monitor the implementation of uniform metrics and reporting standards.

Two important criteria are to be fulfilled. First of all, reporting needs to be compulsory for all companies. A strict mandatory regime should be installed in line with current financial reporting obligations. Second, uniform standards are to be established which will become applicable globally. These criteria can be established in cooperation between governments, regulators, auditors, and companies under the central coordination of a global institute. The IFRS Foundation has a strong track record in bringing consistency, accountability, and transparency in financial reporting. Bringing this expertise to the complexity of sustainability reporting will support uniformity and transparency in sustainability reporting and further strengthen the effective implementation of integrated reporting. The IFRS Foundation is uniquely positioned to take up this task.

It is indeed highly recommended that the IFRS Foundation’s expertise in standard-setting is combined with the knowledge of the existing initiatives (mentioned in section 3 hereabove). Building on this important work and embedding it in the IFRS Foundation standard-setting capacity would be an important step forward.

5. Questions for Consultation

Question 1:
Is there a need for a global set of internationally recognized sustainability reporting standards?

As stated in this open letter, we clearly see the need for a global set of internationally recognized sustainability reporting standards and are of the opinion that the IFRS Foundation is best positioned to take the central role in this process.

Question 2:
Is the development of a sustainability standards board (SSB) to operate under the governance structure of the IFRS Foundation an appropriate approach to achieving further consistency and global comparability in sustainability reporting?

Yes, we certainly believe this to be the appropriate and effective approach. A setup mirroring the existing structure of a three-tiered governance with the IASB as an independent group of experts setting the financial accounting standards is an effective approach. The SSB on the sustainability accounting standards and the IASB on the financial accounting standards united under the umbrella of the IFRS Foundation also facilitates the road to full integrated reporting.

Question 3:
Do you have any comment or suggested additions on the requirements for success as listed in paragraph 31 (including on the requirements for achieving a sufficient level of funding and achieving the appropriate level of technical expertise)?

It is important to find the right mix of technical expertise on both sustainability, accounting and reporting and in staffing the SSB with key stakeholders’ representatives, among others key players from the existing initiatives, as well as having a good geographical spread in support of global consistency.

Question 4:
Could the IFRS Foundation use its relationships with stakeholders to aid the adoption and consistent application of SSB standards globally? If so, under what conditions?

Yes, the IFRS Foundation should use its relationships in support of the establishment of an effective sustainability standards board. Building on our answer to question 3, we believe the IFRS Foundation has an extensive network in the financial, the investment and the business communities as well as with governmental and non-governmental organizations. The reach out of the existing initiatives to the IFRS is also important to include in the foundation of the SSB, as the needed expansion of the capabilities related to sustainability measurement, assessment and reporting within the IFRS Foundation is an important contributor to success. We therefore recommend the IFRS Foundation to use its relationships with stakeholders to aid the adoption and consistent application of SSB standards globally. Furthermore, the independency and legitimacy of the SSB is critical to the success. The IFRS Foundation has demonstrated these qualities in the ways of working of the IASB and as such we are confident this approach can be copied to the SSB.

Question 5:
How could the IFRS Foundation best build upon and work with the existing initiatives in sustainability reporting to achieve further global consistency?

A lot of groundbreaking work has already been performed by the mentioned existing initiatives. The partnership of the five leading initiatives (SASB, GRI, IIRC, CDP and CDSB), as announced in September 2020, already points to convergence. Also, the WEF initiative is actively operating with the Big Four accounting firms. Both groups of initiatives point to each other and to the IFRS Foundation for cooperation. Building on this work, the work of the European Commission (e.g. regulations and directives structured under the EU Green Deal like the NFRD, EU Taxonomy on Sustainable Activities) and of the United Nations (e.g. UN Global Compact, UN Environment Programme – UNEP, UNRISD), as well as staffing the SSB with experts from these sources will allow for an effective jumpstart. The SSB should be the coordinator and leader in the standard-setting process.

Question 6:
How could the IFRS Foundation best build upon and work with the existing jurisdictional initiatives to find a global solution for consistent sustainability reporting?

Big developments have been reached by the EC in the NFRD and in the standards developed by SASB (mainly US-focused) and in the framework established by GRI. Finding the common ground in these regionally developed approaches and establish global consistent standards would be an important step in the process.

Question 7:
If the IFRS Foundation were to establish an SSB, should it initially develop climate-related financial disclosures before potentially broadening its remit into other areas of sustainability reporting?

An initial focus on climate-related financial reporting standards is in line with the pressing needs in minimizing climate change and actively addressing the risks related to human’s current use of the environment. It is, however, important to not define climate related topics too narrowly. Climate-related topics do not only encompass carbon and other greenhouse gas emissions, but also entail biodiversity and land loss, as clearly outlined in the work of the Intergovernmental Panel on Climate Change (IPCC). Additionally, it is important to move beyond climate-related financial reporting to incorporate non-financials at some point (rather sooner than later), even there is a (pragmatic) initial focus on climate-related financials.   The loss of biodiversity and land for instance, are not only caused by climate change but are also in itself further negative impacting climate and it is unclear how this interfaces with firm-level financial disclosures.  As such, the full picture of climate related topics needs to be included, but that may imply that sustainability reporting standards need to move beyond focusing only on financial disclosures. This will allow insights in climate-related impact of companies where direct integration with financial performance cannot be realized. It is our recommendation to be as inclusive as possible with respect to the climate-related disclosures.

Question 8:
Should an SSB have a focused definition of climate-related risks or consider broader environmental factors?

Although a focused definition of climate-related risks sounds attractive and effective, the interrelated effects of broader environmental factors on climate cannot be overlooked. The impact of the economy on land use, fishery, water usage, waste and emissions all have an impact on climate and therewith on biodiversity, whereby the latter subsequently impacts climate change. The broader environmental factors are therefore to be considered by the SSB.

Question 9:
Do you agree with the proposed approach to materiality in paragraph 50 that could be taken by the SSB?

Dual materiality, the impact on the reporting entity as well as impact of the reporting entity on the wider society and environment, is relevant because the two sides of the coin are interrelated. The proposed approach of starting with the materiality from the perspective of the reporting entity is understandable, but may also underestimate firm’s impacts from a wider environmental and/or societal perspective.  As such, we favor a dual materiality approach from the onset.

Question 10:
Should the sustainability information to be disclosed be auditable or subject to external assurance? If not, what different types of assurance would be acceptable for the information disclosed to be reliable and decision-useful?

Sustainability information reported and disclosed should have the same level of trust as the reported and disclosed financial information and therefore such information should be auditable and subject to external assurance.

Question 11:
Stakeholders are welcome to raise any other comment or relevant matters for our consideration.

We believe that strong financial and non-financial reporting is needed and that remuneration of executives should be based on and in line with the long-term overall (integrated financial and non-financial) impact of firms on the wider society and the environment. In order of relevance, it is Planet – People – Profit. We note that the current consultation largely reflects efforts geared towards developing accounting practices with respect to sustainability/Planet. In the future, development and harmonization measurement principles for ‘People-value’ could and should become relevant.

About Reward Value

Better executive remuneration policies lead to better outcomes for both shareholders and other stakeholders (customers, employees and society at large).

Reward Value is building the foundation for new, stakeholder aligned, remuneration policies through a research agenda that serves to answer four questions:

  1. Performance measures. How can ESG measures be integrated with traditional financial measures to arrive at a more reliable, universally accepted and risk-adjusted metric for sustainable long-term value creation?
  2. Performance evaluation. What is the optimum performance evaluation time horizon?
  3. Remuneration structure. Which pay-mix best aligns executive and stakeholder interests?
  4. Corporate governance. How can external regulators and internal boards of directors apply the new model while ensuring board independence and limiting the scope for executives to maximize their benefits