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    One Standard to Rule Them All?

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    A sceptical investor looking for excuses why not to join the ESG train has a few to choose from. At the top of the list is undoubtedly the lack of universally acknowledged standards in the field. If sustainability experts cannot agree on some basic definitions and a common framework, why should a busy financial professional under pressure to fulfil his fiduciary duty pay them any heed, right?

    Well, the latest standards squabble in Sustainaville might just add grist to the sceptics’ mill, I am afraid.

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    It started with a short article published last week in Harvard Business Review, co-authored by Bhakti Mirchandani and the famous Oxford professor Robert G. Eccles. “ESG accounting is a mess,” state the authors plainly. No wonder companies and investors alike are confused as to which standard they should adhere to, given the plethora of existing sustainability reporting frameworks, they argue. The list includes the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-related Financial Disclosures (TCFD), to name but a few of the best-known.

    We all know, of course, that too many standards is basically the same as no standard at all. And so, Eccles and Mirchandani proceed to prescribe a panacea against this dire condition: the International Sustainability Standards Board (ISSB). “Though still fledgling[1], the ISSB’s ideal outcome would be if it becomes a global standard that integrates the work of all previous standards. Ideally, the SEC and EU can use its standards,” dream the authors.

    The article (and Professor Eccles’s LinkedIn post) has attracted a wave of reactions from academia and the investment community. Luckily for us, the fight takes place online, so it is easy, and rather entertaining, to follow. “You’re kidding, right?” outbursts, for instance, Mark W. McElroy, director of the Center for Sustainable Organizations (CSO). “In what way would the integration of all previous standards that have utterly failed to make authentic sustainability reporting possible be an ‘ideal outcome’,” he wonders? Meanwhile, Daniel Roberts from GRMSi ponders whether those with vested economic interests in the various existing frameworks would be satisfied in the pursuit of a single shared standard.

    Another part of this relatively civilised fight points straight to the heart of the ISSB itself. There are those who question the new standard’s sole focus on climate and financial materiality. Single materiality is quite passé, after all. The community has moved on to the more evolved double, dynamic or contextual versions. The conceptual implications of choosing materiality 1.0 are quite real. One of the most outspoken critics of ISSB’s approach, Bill Baue, co-founder of the Sustainability Context Group, claims that the faulty standard (which he keeps calling I?SB) “paves the path for enterprises to absolve themselves of accountability for their (inside-out) impacts on the real world”.

    “Whoo hoo…a good fight!” cheers Professor Hunter Lovins, the President of Natural Capitalism Solutions. Is it, though? Granted, in a developing field like sustainable finance (not to be confused with ESG, according to Eccles’s critics, by the way), intellectual debate and critical thinking should be encouraged. Perhaps we should be a bit more careful, though, not to harm its somewhat fragile image and thus hamper the meaningful efforts of many sustainability warriors.

    PS The debate/fight has escalated since. Watch this space

    Image by Pau Llopart Cervello from Pixabay

    [1] ISSB was born at the Cop 26 summit last year. On 3 November 2021, the IFRS Foundation Trustees officially announced the creation of the new standard-setting board.

    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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