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Impact Will Have its Place in ISSB Reporting – IOSCO Chair

UN SDGs’ 2030 deadline driving impact focus, but social measurement and reporting remain a “heavy lift”. 

Impact measurements will increasingly inform disclosures made under the International Sustainability Standards Board’s (ISSB) reporting standards, according to Ashley Alder, Chair of the International Organisation of Securities Commissions (IOSCO). 

Speaking at the Global Steering Group for Impact Investing’s (GSG) ‘Impact Summit Series 2022’ event, Alder explained that, despite the ISSB’s focus on enterprise value, its proposed standard for climate reporting will provide more insight into companies’ environmental impacts as and when these become more financially material. 

“As the disclosure of impact becomes more relevant to a whole range of stakeholders, it will increasingly interact with measurements which inform enterprise value,” he said. 

The ISSB, which was launched by the IFRS Foundation in November at COP26 and is endorsed by IOSCO, is currently consulting on its first proposals for investor-focused general sustainability and climate disclosure standards. Due to be finalised by the end of this year, the standards focus on how risks are impacting companies’ financial performance – known as enterprise value. 

Jurisdictions such as the UK and EU are developing reporting standards through a double materiality lens, requiring companies and investors to also report on their impact on the environment. 

“The ISSB is focusing on information that is most relevant to the providers of capital – in other words, investors,” said Alder, who is also Chief Executive of the Hong Kong Securities and Futures Commission. “This clearly correlates with the disclosure interests of regulators. My view is that the difference [between enterprise value-focused reporting and double materiality] is more apparent than real.” 

Clock ticking down for SDG impact  

Institutional investors are increasingly adopting impact investing strategies, with many using the UN Sustainable Development Goals (SDGs) as a framework. 

A 2021 report by research consultancy firm Cerulli noted that 66% of assessed US asset owners had hired or planned to hire an asset manager to oversee their impact investing strategy. Research by the Impact Investing Institute suggests the UK market could double in the next five years.  

However, with between US$5-US$7 trillion of investment needed a year to achieve the 17 SDGs’ 169 targets by 2030, “the world is not moving nearly fast enough”, said Douglas Peterson, President and CEO of ratings and data provider S&P Global, also speaking at the GSG event. 

Peterson leads the Impact Taskforce (ITF) working group focused on harmonising impact reporting and transparency. The ITF was launched last year under the secretariat of the GSG to facilitate discussions and recommendations around impact transparency and integrity, investigating ways to create financial vehicles that will channel investments to achieve beneficial environmental and social outcomes. 

As outlined in a recent report published by an EDM Council ESG working group, asset owners are currently struggling to find consistent and meaningful ways of measuring the contribution of their current investments to the SDGs.  

Peterson nonetheless said he remains optimistic, drawing a comparison with the time it took for the US to realise President John F Kennedy’s 1962 ambition to put a man on the moon. 

“We’re now within eight years of the deadline to reach the SDGs. We know what needs to be done. Now is the time for action, so let’s redouble our efforts,” Peterson said, adding that increased transparency, harmonised disclosure standards and better data are all “fundamental steps” towards achieving these goals by 2030. 

Lack of regulatory focus on social impact 

For investors to be able to measure their overall contribution to the SDGs, they will need standardised and widely adopted frameworks for social impact measurement.  

However, while environmental impact reporting is likely to be incorporated into existing disclosure standards and mandatory reporting requirements over time, social impact reporting is several steps behind.  

Regulating the measurement of social-related impact will be a “heavy lift”, Alder said. 

“Social impact is a topic that has been discussed broadly amongst stakeholders, but it hasn’t appeared as a topic on the regulatory stage to the same extent,” he noted. 

This is largely down to the complexities around measuring and quantifying social-related factors, as well as regulators single-mindedly focusing on developing and implementing climate-related regulations, Alder said. 

One of the main issues with social-related performance scores is that they are largely derived from intrinsically qualitative information, causing inconsistency in the data provided to investors by third-party vendors. 

Climate performance can be tracked according to a company’s annual emissions, but a company’s oversight of human rights abuses along its supply chains or its performance on diversity and inclusion is much harder to quantify.   

Inconsistent and incomplete company disclosures therefore have a knock-on effect for investors trying to secure decision-useful data on social impact.  

“It’s a really complex issue,” said Alder. “While climate-focused measurement tools take a science-based approach, much of the social agenda hinges on values. On an international stage, these values will differ and could result in widely variable approaches.” 

Without mandating social-related disclosures, investors will be forced to rely on a patchwork of third-party vendors and voluntary frameworks to discern their degree of social impact and alignment to the social-focused SDGs. 

In comparison to the climate crisis, social issues are not being tackled by regulators with the same level of urgency.  

“Regulators are hyper-focusing on climate regulation – which is hard enough – and therefore don’t have the bandwidth to go any further than that at this point in time,” Alder said. 

Continued pressure from the private sector and investors focused on measuring their social impact will likely push regulators to involve themselves, countered Roger Ferguson, Former Vice Chair of the US Federal Reserve. 

“The willingness of regulators to venture into this area of impact will be influenced by those who want to see a just transition to net zero,” Ferguson said.  

“Although it will be a heavy lift for regulators, if the private sector thinks this is important, they will continue to put pressure on regulators until they take action.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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