By Elvin Madamba and Snehal Khade

Welcome to another edition of Actionable Insights! In this blog, we take you behind the scenes of our Competent Boards education sessions to bring exclusive corporate intel and share valuable knowledge from our faculty speakers, a global pool of board directors, and industry experts.

The following insights come from Session 5 (How to Build ESG Oversight and Foresight) of our most recent sold-out ESG Designation Program, which started in February. We have more cohorts rolling out this Fall and in 2024, so book your place today to be a part of a fascinating knowledge-sharing community! We have a new global program suited for Asia Pacific time zones as well.

Drawing from the ESG oversight and foresight session, we dive into the new terrain charted by the International Sustainability Standards Board‘s (ISSB) introduction of the International Financial Reporting Standards (IFRS) S1 and S2 in June 2023. These standards respond to the global clamour for a standardized language for sustainability-related disclosures. Scheduled for implementation in 2024, these standards mark a significant leap toward a future where environmental, social, and governance (ESG) considerations are integral to corporate strategy and financial reporting.

Here are the key takeaways:

Getting to Know the New Sustainability Standards

The new IFRS sustainability standards have created a clear plan built on four main parts: Governance, Strategy, Risk Management, and Metrics and Targets. These ideas aren’t new; they follow the foundational principles long advocated by the Task Force on Climate-Related Financial Disclosures (TCFD) and now form the backbone of the new standards. 

But there’s more depth to this structure, too. The existing Sustainability Accounting Standards Board (SASB) standards give detailed, industry-specific guidelines that cater to a wide range of sectors.

The standards’ credibility and importance were further boosted by the recent endorsement from the International Organization of Securities Commissions (IOSCO). With support from IOSCO, these standards apply across 130 member jurisdictions, creating a unified approach for financial regulators globally.

We’ve made good strides when it comes to talking about corporate sustainability. A decade ago, this topic was just something for PR and sustainability teams to worry about. Now, it’s front and center for the people who control the money. The shift shows that we’ve started to understand that doing right by the planet isn’t just a nice thing to do; it’s tied directly to how businesses succeed financially.

This change in perspective is reshaping the whole way we think about ESG. Companies must prepare for a world where what they do for the planet is as important as their profits. Now, it is part of a smart, future-looking business plan.

Why Governance Matters More Than Ever

In this new landscape, governance takes center stage. Good governance requires companies to establish a strong foundation before changing their strategies or setting new goals. 

The S1 and S2 standards don’t give a step-by-step guide on how to run a company. Instead, they encourage the need to think again about how things are done. These standards demand a harder look at existing processes to ensure they’re up to scratch.

The standards ask companies to consider the following

  • Keeping the board in the loop: How often are the board and any relevant committees told about the opportunities and risks tied to sustainability?
  • Defining who does what: How do company documents spell out who is responsible for watching over opportunities and risks linked to climate change?
  • Ensuring the right skills: How do the board and any relevant committees ensure they have the skills and competencies to tackle sustainability challenges?

To adapt to these new standards, organizations must have strong governance. It’s a blueprint for investors, laying out every detail of how a company orchestrates its sustainability goals. It’s not merely about leadership competence; it’s a well-structured team where everyone’s role is clear, working harmoniously towards a collective vision of sustainability.

When Sustainability Counts in Dollars

The S1 and S2 standards recognize sustainability as a critical financial consideration, paving a pathway for identifying relevant topics and how they can be disclosed. More than a compliance issue, these standards advocate for a strategic alignment that seamlessly blends sustainability into an organization’s decision-making processes.

These standards construct a framework that integrates sustainability data into the financial story of the organization. By placing it on an equal footing with general governance or taxation information, they create a well-rounded perspective on sustainability. It’s not just an add-on; it’s positioned as a core element of financial success and a cornerstone of long-term planning.

Using Top-Quality ‘Director Grade’ Data

The quality of sustainability data plays an important role in the new ESG landscape. Neil Stewart, Director of Corporate Outreach from the IFRS Foundation, put it best when he said, “Investor-grade sustainability disclosure is now critical — consistent, comparable reliable data. Another term for that calibre of information is ‘Director-grade’ data.” In other words, the data has to be top-notch, the kind that company directors use to make big decisions.

‘Director-grade’ data is the cornerstone of investment decisions, company strategy, and risk management.

But there’s more to it. The ISSB aims to make sense of the fragmented landscape of sustainability standards and frameworks. They’re aiming to make everything consistent and comparable, cutting down the costs, confusion, and risks for both businesses and the people who invest in them.

Making ESG Ratings More Reliable

SASB standards, says Neil Stewart, can lead to more accurate ESG ratings. He puts it frankly, “Companies will often say, if I use the SASB standards, will our ESG rating improve? And I always say, well, I don’t know if it’ll go up or down, but it will be more accurate, right? Because you will be taking control of your information, and you’ll be communicating in a common language.”

It’s not just about making the ratings go up and down. Rather, it’s about getting it right, like switching from a wobbly old yardstick to a precise new ruler.

With these standards, companies will have more consistent numbers and improved transparency and credibility. They’re taking charge of what they say about themselves in a way everyone can understand. This isn’t just about looking good on paper; it’s about laying everything out in the open with honesty, clarity, and trust.

By stepping up to this challenge, companies can do more than talk about their sustainability narrative, they can speak a language that resonates with investors and other stakeholders.

Collaboration and Learning: The Way Forward

Think of these new standards as the playbook; it guides companies to share information about their sustainability efforts. If a company resists these, it’s like they are not speaking the same language as everyone else. This misalignment can open them up to legal and market risks.

The goal is to clear up the confusion and make everything more straightforward, helping business leaders and investors make smarter choices.

Neil Stewart sums it up brilliantly, “Besides investment decisions, today’s sustainability data is used for executive compensation, M&A, and capital allocation within companies, not to mention setting strategy, managing risk and, of course, buying decisions up and down the value chain. You’re asking for it from your suppliers, and your customers are asking it from you. So this data really is the new currency of business.” 

If board members, executives and business leaders want a healthy company, they must understand the whole picture, inside and out. That means working with the ISSB to grasp everything from their everyday operations to their broader value chain.

But it’s not just a top-down effort. The key is getting everyone on board, from the managers to the employees.

So, how to make this happen? Training. When you take the time to educate every level of the organization about these standards, you’re essentially laying the groundwork. You’re helping everyone understand that sustainability isn’t just a buzzword; it’s a core business principle that impacts everything from the financial health to the broader societal footprint of the company. This isn’t a surface-level makeover; it’s about ingraining a perspective that aligns with the organization’s financial and ethical compass.

Preparing for the Future

As the 2024 implementation of the IFRS S1 and S2 standards approaches, the focus is on strategic preparation. Understanding these changes isn’t just about compliance; it’s a chance to turn sustainability into a strategic advantage. Companies that are ready and well-aligned with these standards will be better positioned to thrive in the evolving business landscape.

Elvin Madamba is Senior Program Manager, and Snehal Khade is ESG Program Associate at Competent Boards. Follow Competent Boards on LinkedIn

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