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Professional views on 'harmonization' of sustainability standards (Part 4)

Annjil Chong, DIGITIMES, Taipei 0

Credit: Unsplash

Some professionals believe that harmonization of sustainability standards will make it easier for companies to assess and manage their risks. Others believe that harmonization of sustainability standards is challenging as different governments have different systems.

This article discusses professional views on the harmonization of sustainability standards, with an emphasis on what they believe will be the benefits and drawbacks of this process.

Ching-pin Tung, a professor in the Department of Bioenvironmental Systems Engineering at National Taiwan University, commented in response to ISSB's establishment of the global baseline sustainability disclosures in an interview with DIGITIMES Asia.

Tung said, "I believe that ISSB will solve the standardization issue and I'm very positive for the future."

For companies struggling with non-financial reporting, Tung outlined a three-step method for tracking and reporting ESG performance: identification, evaluation, and valuation. The following is an overview of the method:

Idea in Practice

Step

Step 1

Identification

Step 2

Evaluation

Step 3

Valuation

Definition

Assess ESG risk and opportunity within your company.

Get the measure of how many ESG-related items your company has.

Estimate the monetary worth of ESG impact on your company.

Example questions

*What kind of ESG issues are related to your company?

*What are the positive and negative impacts your company produces?

* What is the number of resources and raw materials that are used? *What is the amount of waste and the emissions that they generate?

*How can your company assign a monetary value to the positive and negative impacts?

Note. ESG = Environmental, social, and governance. Source: Ching-pin Tung. Compiled by DIGITIMES Asia, June 2022.

Tung further explained, "I think environmental, social, and governance (ESG) reporting is slightly different from non-financial reporting. This is because ESG reports only identify the company's ESG performance. But the non-financial report includes both the evaluation and valuation procedures."

From Tung's perspective, the identification step is the easiest of all. "Regarding the idea of including non-financial issues in the financial report, I think that there may be challenges in the evaluation and valuation steps, especially evaluating impacts. But the world needs a standardized approach. Many efforts may need to be devoted in order for the ISSB to achieve that," he added.

The International Sustainability Standards Board (ISSB) is a coalition of sustainability standards organizations that are committed to harmonizing their standards and ensuring that they are aligned with one another.

This will allow for a better understanding of the sustainability performance of different companies and products. The ISSB proposed two IFRS sustainability disclosure standards, namely the General Requirements Exposure Draft and the Climate Exposure Draft.

The architecture of the standards is taken from the Task Force on Climate-Related Financial Disclosures (TCFD) structure, building on the Climate Disclosure Standards Board (CDSB) and the Sustainability Accounting Standards Board (SASB).

Both of the ISSB drafts' structures are consistent with TCFD recommendations. There are four core elements including governance, strategy, risk management, and metrics and targets. The focus of the standards is on investor audience and enterprise value.

Structure consistent with TCFD recommendations

Core Element

Governance

Strategy

Risk management

Metrics and target

The governance processes, controls, and procedures a reporting entity uses to monitor sustainability-related risks and opportunities.

The sustainability-related risks and opportunities that could enhance the entity's business model and strategy over the short, medium, and long term.

How sustainability-related risks are identified, assessed, managed, and mitigated?

Information is used to manage and monitor the entity's performance in relation to sustainability-related risks and opportunities over time.

Source: IFRS. Compiled by DIGITIMES Asia, in June 2022.

DIGITIMES Asia believes that these four core elements serve as the blueprints for companies to assess and evaluate their ESG's risk and opportunity.

Ching-pin Tung, a professor in the Department of Bioenvironmental Systems Engineering at National Taiwan University

Ching-pin Tung, a professor in the Department of Bioenvironmental Systems Engineering at National Taiwan University

The General Requirements Exposure Draft

The General Requirements Exposure Draft requires companies to provide material information on all significant sustainability-related risks and opportunities necessary to assess enterprise value.

Building on CDSB and SASB, the General Requirements Exposure Draft emphasizes the need for consistency and connections between financial statements and sustainability reporting by requiring companies to explain linkages in information and use consistent assumptions when relevant.

General Requirements Exposure Draft also requires financial statements and sustainability disclosures to be published at the same time as well as facilitates application in different jurisdictions. More particularly, it allows additional information to be provided and does not specify a particular location for sustainability information.

CDSB and SASBs' key features in the General Requirements Exposure Draft:

The General Requirements Exposure Draft

CDSB

SASB

*CDSB Framework application guidance used to assist in the selection of specific water-and biodiversity-related financial disclosures in the absence of specific IFRS requirements

*Illustrative guidance booklet illustrates the use CDSB materials

*'Connected information' and 'location of information built from the CDSB Framework's guiding principles

*SASB Standards disclosure topics used to identify sustainability-related risks and opportunities

*SASB Standards used to select metrics in the absence of specific IFRS requirements

*Illustrative Guidance shows the use of SASB Standards

*Proposed disclosure of which SASB industry classification(s) a company has used

Source: IFRS. Compiled by DIGITIMES Asia, in June 2022.

The Climate Exposure Draft

The Climate Exposure Draft, on the other hand, requires a company to disclose material information about significant climate-related risks and opportunities. For example, information related to physical risks (i.e., flood risk), transition risks (i.e., regulatory change), and climate-related opportunities (i.e., new technology).

Climate Exposure Draft incorporates TCFD recommendations and includes SASB's climate-related industry-based requirements.

Key features of the Climate Exposure Draft include transition planning of emissions targets and the use of carbon offsets, climate resilience and the resilience of business strategy in multiple scenarios, and the requirement to disclose GHG emissions for Scope 1 to 3 emissions.

When rethinking is required

DIGITIMES Asia noticed that both drafts stop at the evaluation step. The valuation step, as Tung said, exactly, is still up in the air.

The valuation step is where the impact valuation of a company is determined. This is done by assessing which aspects of the company have an effect on the ES and then transforming these calculations into monetary form.

Therefore, DIGITIMES Asia thinks ISSB may be jumping the gun a little bit.

But more important to DIGITIMES Asia than accounting is having the right infrastructure to ensure that what a company's measuring is transparent, accountable, compatible, comparable, and can be audited before it's put into the accounting process.

Third-party verification

DIGITIMES Asia then asked, "Do we need an auditor to check the accuracy of the non-financial reporting?"

Surprisingly, Tung suggested an impact verification company instead of an audit firm to offer a third-party perspective on whether companies' impact practices and performance are credible.

Impact verification is the assessment of an investor's impact management practices or impact performance against specific industry standards, such as the Operating Principles for Impact Management (OPIM) or the Sustainable Development Goals (SDGs).

Surin Segar, the Malaysia Division Deputy President of CPA Australia.

Surin Segar, the Malaysia Division Deputy President of CPA Australia.

Global ESG reporting standards taking shape

Surin Segar, the Malaysia Division Deputy President of CPA Australia and chair of the recently established ESG Advisory Group, had a negative response to the calls for harmonization, as compared to Tung.

In the "World Environment Day Focus: Sustainability webinar" on June 1, 2022, when DIGITIMES Asia asked his thoughts about global ESG reporting standards taking shape, he replied,

"The problem is when governments in our part of the region do not adopt the same use, then those things get sort of derailed. Even in my tax profession, sometimes some of the things that are passed to avoid tax evasion on a global basis aren't being changed as quickly as they should be. That's where the issue is."

Segar continued, "Just to add on that, if you're trying to ask an SME [small and medium enterprise] to go and be ESG compliant today, I think the timing is wrong. Many of them have suffered a lot in the last two years [due to the COVID-19 pandemic]. Hopefully, they can find their footing this year and probably come back to pre-pandemic levels. If you tell them need to do this or do that, or whatever, a lot of people are going to just turn their backs away."

Editor's note:

To give our readers a thorough understanding of the ESG standards and implementation, DIGITIMES Asia will publish five articles on the subject. The first three parts are standards and frameworks, ESG Implementation, and harmonization of sustainability standards.

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