A step towards international sustainability standards

08/30/2021

The Institute responds to the IFRS Foundation’s proposed new board



In April, the International Financial Reporting Standards (IFRS) Foundation published two documents related to the creation of a new sustainability standards board. The first was a feedback statement on its September 2020 Consultation Paper on Sustainability Reporting, which the Institute had responded to in a comment letter available on our website.

Feedback to the consultation paper indicated that there is broad support and demand to work towards creating a new international sustainability standards board. The Trustees of the IFRS Foundation have decided on their strategic direction for sustainability reporting, which includes: (i) a focus on enterprise value for investors; (ii) initially prioritizing climate-related reporting; (iii) building on existing frameworks; and (iv) leveraging a building blocks approach that will provide flexibility for integrating with other sustainability reporting requirements. 

The second document was the Exposure Draft (ED) Proposed Targeted Amendments to the IFRS Foundation Constitution to Accommodate an International Sustainability Standards Board to Set IFRS Sustainability Standards. The ED addresses due process and governance issues and paves the way for the creation of a new sustainability standards board. The ED proposes:

  • Expanding the IFRS Foundation’s remit to allow it to create a new board that will set IFRS sustainability standards;
  • The structure of a new board – an International Sustainability Standards Board (ISSB) under the IFRS Foundation’s governance structure to set IFRS sustainability standards; and
  • Making consequential amendments to the IFRS Foundation’s governance charter.

The Institute responded to the ED in July after a local public comment period. This article provides a high-level summary of our response. Readers may refer to the Institute’s full comment letter on our website.

The Institute broadly agrees the proposed governance structure will provide adequate oversight of the ISSB, and considers that the amendments are proportionate to the Trustees’ strategic direction. The Institute’s response, summarized below, helps contribute to enhancing Hong Kong’s position as a leader in sustainability and support the future development of the ISSB if and when it is set up. 

Expanding the IFRS Foundation’s remit to create a sustainability standards board

We think the IFRS Foundation offers a robust governance structure with requisite processes, experience and relationships to support a new board, and recommended that the IFRS Foundation continue with its intention to leverage on the expertise of existing initiatives.

The scope of sustainability reporting can be wide and involve a large range of stakeholders. We recommended the Trustees consider key terms such as “sustainability,” “multi-stakeholder sustainability reporting” and “other users” to best clarify the objectives and scope of the ISSB, and avoid confusion among stakeholders. We also noted the importance of considering the interdependency between enterprise value-focused sustainability reporting and broader multi-stakeholder sustainability reporting, and the ability for entities to leverage on the same information for both types of reporting.

We further commented on a number of areas including on governance objectives needed to achieve full and fair consultation (e.g. to make the threshold for voting on major publications congruent with that of the International Accounting Standards Board (IASB)), the processes surrounding the ISSB’s initial work plan and proposed temporary exception to standard due process, and certain drafting issues.

Naming of the new board and its sustainability standards

We noted that the ED proposes to retain the IFRS Foundation’s current name, and have two boards setting IFRS standards – “IFRS sustainability standards” by the ISSB, and “IFRS accounting standards” by the IASB. While we considered that these names describe the relevant functions of the boards, we suggested the IASB to consider various issues, e.g. will existing IFRSs need to be renamed to avoid confusion with the new IFRS sustainability standards? What abbreviations does the IFRS Foundation expect will develop in practice? We also recommended that the IFRS Foundation take care to be clear in its communications and labelling so as to avoid engendering misperceptions and confusion among stakeholders who view sustainability matters more broadly. 

Other amendments to the IFRS Foundation’s governance

We agreed with the proposed amendment to stipulate that the Executive Director of the IFRS Foundation should be appointed by the Trustees after consultation with the chairs of the IASB and ISSB. We also suggested clarification to be made as to the staffing authority of the IASB and ISSB chairs.

We further suggested that as the two boards will work in parallel with each other, there will be interaction among them and hence there should be a due process in place to enable each board to leverage off the other’s expertise. Consideration should further be given to the scope and how overlapping issues will be resolved, and what interim measures will be in place to handle interpretation issues prior to the existence of an interpretations committee for sustainability standards.


IFRS Foundation’s next steps

The Trustees are currently planning to make a final decision about whether to create the new board at the November 2021 United Nations Climate Change Conference. In addition, the IFRS Foundation:

  • Is currently seeking nominations for the Chair and Vice-Chair of the proposed ISSB.
  • Has established an Eminent Persons Group to provide strategic advice to the Trustees.
  • Has joined the International Platform on Sustainable Finance as an observer.
  • Has created two working groups (Technical Readiness Working Group and Multilateral Working Group) to provide advice on the proposed ISSB. 

This article was contributed by Tiernan Ketchum, Deputy Director, Norman Chan FCPA (practising), Associate Director and Anthony Wong CPA, Associate Director, of the Institute’s Standard Setting Department