In its letter to the ISSB on the exposure drafts for international financial reporting standards on sustainability and climate-related disclosures, Finance Watch emphasises that a fundamental change in the outside-in only approach taken to financial materiality, or risks and opportunities, is needed in the current drafts.
Finance Watch urges the ISSB to embed the double materiality principle in the global baseline standards acknowledging the importance of disclosures on impacts that businesses have on people and the environment. They are of particular relevance for the growing number of investors. They are also needed to properly evaluate and design climate targets and transition plans.
This is essential if the standards aim to take a step towards creating a global framework that ensures transparency and accountability for companies and investors.
This is not only key to assess the impact of economic activity on the planet’s sustainability, but, as importantly, has an obvious impact on financial materiality.
As the world becomes less and less sustainable, business’s risks are on the rise and its opportunities diminish . If the draft standards do not consider inside-out impact materiality, they will not be useful to assess properly the outside-in effect of climate change on companies. The standards must be built on the basis that impact materiality feeds financial materiality.
Finance Watch also empahises that there is one major gap in the current exposure drafts that needs to be filled: the current proposal for transition plans leaves the possibility for greenhouse gas (GHG) emissions reduction targets not to consider absolute emissions. Entities should disclose both intensity and absolute targets, rather than choosing between them.
Additionally, climate targets need to be broken down into short-medium-term and long-term targets, ideally with a requirement to align the timeframes and the base year. A crucial adjustment is also needed to ensure that targets include actions to be taken if the climate-related target is not reached.
Upgrades and areas of improvement included in the document:
- To create more robust requirements for defining sustainability and climate-related risks. To do this the double-materiality logic should expand the scope of the standards beyond enterprise value of entities and extend to the value chain and environment they operate in. Existing Finance Watch work on banking and insurance prudential regulation could provide the basis for a differentiated approach to existing and new or expansion high GHG-emitted sector activity .
- To extend the scope of the draft standard on sustainability-related disclosure beyond climate. This more comprehensive approach should consider social and human rights issues around just transition, which is part of the cost and impact of climate change on entities.
- The alignment and consistency with other ongoing work on reporting standards. The European Financial Reporting Advisory Group (EFRAG) is delivering European Sustainability Reporting Standards and is already quite advanced in this process.