ISSB is the catalyst to accelerate sustainable investment

According to ancient parable thought to have arisen in Mesopotamia around the 7th century BC, a group of builders who embarked on the uniquely technical and complex task of building the tallest tower ever suddenly found themselves speaking different languages. Although the goal was still the same, the lack of a common language led to the failure of the project. 

The lesson of the Tower of Babel has not been lost on corporates large and small, tasked with disclosing a myriad of sustainability information in different ways. Nor has it been lost on international investors, who are grappling with the disparate pieces of information to inform their asset allocation decisions.

All this serves as an important reminder of how financial markets rely on a common language to operate effectively. Given that the current consensus on financial accounting standards took hundreds of years to evolve, it is perhaps unsurprising that consensus on sustainability metrics has proven allusive in recent years and a contradictory patchwork of standards, definitions and metrics has sprung up.

That is why the creation of the International Sustainability Standards Board (ISSB) in late 2021 and its inaugural S1 and S2 sustainable reporting standards published this week are so important. They will deliver the practical, flexible and interoperable global baseline for corporate sustainability reporting that we urgently need.

To date, there has been a lack of comparable, investment grade data on sustainability. This has had a knock-on impact on disclosure levels amongst corporates globally. Even at the larger end of the market where reporting is more forthcoming, particularly in more carbon intensive sectors, 42 percent of all large and mid-cap listed companies globally do not report basic sustainability data, the greenhouse gas Scope 1 and 2 carbon emissions. These are those associated with their direct to air emissions and those resulting from their energy use.

Outside of Europe and across emerging markets, the data is even scarcer. In China, of the approximately 1000 companies in FTSE China A Series only 10 percent report this data, and this figure is the same for the Russell 2000. At its most basic level, that’s a huge knowledge gap in investor portfolios that has not improved in several years.

This comes as we see substantial inflows into mutual fund and ETF investment products marketed for their environmental, social and governance credentials. LSEG’s Lipper business found that, excluding money markets, sustainable funds attracted £27.6bn in 2022 as their conventional peers suffered outflows of £66.9bn.

We believe that policymakers now have a unique opportunity to accelerate progress by introducing mandatory disclosure rules for companies which adopt or align with the ISSB standards by 2025. Doing so will facilitate better availability and consistency of sustainability-related information.

Many stakeholders have understood the critical importance of getting this right and the benefits it can bring to the increasing number of public-private partnerships focused on greening our energy sector. Better disclosure on metrics such as green revenues can help investors pinpoint opportunities and provide much needed capital for green growth.

We have seen several countries take a leading role already. Major financial centres including the UK, Hong Kong and Singapore have shown strong support for ISSB. Other countries have shown widespread adoption of the Task Force on Climate-related Financial Disclosures’ recommendations, and adopting the ISSB standards which build on this framework is a logical next step.

Looking beyond the regulatory picture, investors are almost unanimously calling for a minimum coverage of sustainability disclosure. Availability of data was cited as the number one barrier to further sustainable investment adoption in a 2022 survey of asset owners conducted by LSEG’s global index provider, FTSE Russell. Concern about data quality or consistency of corporate reporting and disclosures followed in joint second.

As an example, the quality of green activities disclosure is central to support the transition to a low carbon economy. Indeed, FTSE Russell found that in a scenario where the global economy pivots to a 1.5°C path, the green economy exposure in global benchmarks would jump more than threefold from 2020 to 2030. This would have an immediate impact on the growing numbers of investors who use passive, index tracking strategies which replicate the composition of key benchmarks such as the Russell 1000 or FTSE Emerging Index.

But we still have a long way to go. Sustainability is about much more than climate and the ISSB is currently consulting on expanding its work to cover several other key areas including biodiversity and human rights.

This week marks an important milestone. To embed sustainability priorities like climate into the way financial markets operate we need a common language that can be used between the corporate and financial communities to invest and grow the industries of the future.

It’s essential that we now use ISSB to deliver a step-change in the quantity and quality of sustainability related information available. Doing so will mean our metaphorical tower of babel stands a chance of completion and financial markets will better serve society in facilitating solutions to the world’s biggest sustainability challenges.

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