Jane: [00:00:01] Hello, I’m Jane Goodland and this is the LSEG Sustainable Growth Podcast, where we talk to leading experts on a wide range of issues that touch on both the worlds of sustainability and finance. This week I had the pleasure of talking to Sue Lloyd, who is the Vice chair of the International Sustainability Standards Board, otherwise known as ISSB, about the launch of its new standards for corporate sustainability reporting, which is an incredibly important milestone and potential game changer for businesses and investors alike. So, let's hear more from Sue.
Jane: [00:00:37] So hello, Sue. Thank you so much for joining us. I know you're a very busy lady, so we really do appreciate the time that you're giving us today. Let's start by looking at the new standards that are being launched, which were launched in June. And really just tell us what's the purpose of these new sustainability disclosures standards and why do we need them?
Sue: [00:00:58] Great place to start. So, the purpose of these standards is to meet the needs of investors who increasingly need information to understand how sustainability related risks and opportunities, including climate, are going to affect the prospects of a company and also to find where opportunities are for investment. And what we found was that there was quite a lot of information available in the market about sustainability risks and opportunities, but it was very fragmented. There were lots of different frameworks. It was hard for investors to make comparisons from company to company, and it was confusing for companies and expensive as well to navigate all of these frameworks. So, the purpose of our standards in a nutshell is to reduce the complexity of that reporting environment and to make sure that companies can communicate well to investors the information they need to make informed investment decisions and understand how sustainability is going to affect a company.
Jane: [00:01:56] I think that sounds brilliant as a holy grail for companies having to disclose sustainability matters. And there's so many different frameworks. So, yeah, I for one am very happy about the introduction of the new ISSB standards. But these have been developed quite quickly, haven't they, because financial reporting standards which effectively provide the global language for business and investment decision making, they were evolved over a long period of time and we've had lots of time to get used to those financial standards. But by contrast, the sustainability standards have been created very, very quickly. So, I'm keen to understand how on earth do you pull something off like that? What's the secret to that swift development?
Sue: [00:02:39] Well, being focused and disciplined and in our standard setting, of course, is a good place to start. But we really benefited from that confusing landscape that I mentioned in my first comments. It meant that a lot of good work had already been done by people in the sustainability reporting space, and so there was some established practice. And so, what we were able to benefit from and what our stakeholders really clearly told us when we were being established was not starting with a blank sheet of paper, really starting with good market practice and building from there. So as part of our consolidation, we consolidated the Climate Disclosure Standards Board and the SASB, the and the Integrated reporting framework, which meant we had that in house and we built from the work of the TCFD. So, by building from established market practice and working to improve that and pulling it all together through this consolidation exercise, we were able to benefit from the work that had been done before, and that enabled us to move more quickly than if we had started with a blank sheet of paper. And also, even before the board was set up, we had the benefit of a technical readiness working group that had pulled together some prototype documents that people might remember were published at the time of COP 26. And so, we started from those developing our exposure drafts as well.
Jane: [00:04:00] And presumably you've been engaging with a vast myriad of stakeholders along this whole process, right?
Sue: [00:04:07] Totally. We did it quickly, but we still consulted. And that's a really, really important thing for the IFRS Foundation and for the ISSB’s processes. So, we received more than 1,400 comment letters. We estimate we were in front of more than 30,000 people when our documents were out for comment. And so, it's not that we sort of decided not to consult. We just did it in an efficient way and we were working with materials. So, it had a level of familiarity for many of our stakeholders which really helped us all along.
Jane: [00:04:37] It's really very impressive. Sue, in terms of how quickly you've moved through that process. So, let's turn our attention to the adoption of these standards, because actually the publication of them is one thing, but actually having them be adopted around the world is another. And now, if you look at the IFRS reporting standards for financial disclosures, they've been adopted by 100 or over 140 countries around the world. So, if we're looking at a similar kind of ambition on sustainability, what's the plan to actually get these adopted at scale? And also quite quickly, I suppose.
Sue: [00:05:13] Yeah. And you're right, it's one thing to publish a standards and what we want is people to use these standards and to get this information out there in the market. So that's where we're putting a lot of our attention now. And so, the plan here is really to have a mix of regulatory requirements that result in the use of the standards, which is what has happened with the IFRS accounting standards, where jurisdictions have chosen to require companies to use the standards, but also voluntary use of the standards. So, I'll touch on both of those. So, a really important catalyst to regulators and jurisdictions asking companies to use our standards is the fact that the international securities regulators, IOSCO, formally endorsed our standards in July, so they came out and said the ISSB standards are fit for use in global capital markets. And more than that, they called on there more than 130 members around the world to make use of our standards. And so that's a really important signal to securities regulators and governments around the world that these are good standards to use. And we can see many consultations around the world and many different jurisdictions the UK, Japan, Singapore, Australia, to name just a few, that are looking to introduce our standards. And some jurisdictions, including a number in Africa, starting with Nigeria already indicating use. And so, this is sort of regulatory adoption of our standards. So, we're very actively engaged in those conversations.
Jane: [00:06:35] Can I just dive a bit deeper into the jurisdictions doing those consultations? What's actually involved in that in terms of what do individual countries typically have to do or what are they typically doing in order to go through that adoption process?
Sue: [00:06:51] Yeah, it depends on the country. So, some jurisdictions have really made a decision very early on at a sort of government style level. Nigeria, for example, other jurisdictions are consulting with their stakeholders and what they're doing, and I'll use Australia as an example. The Treasury in Australia have put out a consultation where they've asked their market, is there a need for sustainability requirements, Should we start with climate first and should we build on the work of the ISSB? And that's the sort of consultation we're seeing in a lot of different jurisdictions where they're saying to their stakeholders, What do you think? And then they'll move to put in place the regulatory framework, if you like, to build on or introduce our standards directly into their country. So that's a consultation going on around the world. Japan's a little bit different. They're going to build a Japanese standards which will be in Japanese that will build on our standards. So, it's a different mechanism, but the same punch line that they build on this global baseline.
Jane: [00:07:48] And then over what time period do you think that these consultations in sort of major markets will happen? What's your sense of that?
Sue: [00:07:56] Well, interestingly, a number of jurisdictions launched their consultations even before we published our standards. So, Hong Kong, for example, launched their consultations even before we published. And a number of these consultations are ending around now. And they have indicated intent to sort of make decisions in the next six months to a year. Other jurisdictions haven't consulted yet. So, I think we'll see a whole range, partly depending on where they were with their own reporting requirements. So, we'll see a range of activities here, hopefully quite prompt given the calls for urgency on climate disclosure front. The other thing is, in addition to this whole regulatory conversation that we're very involved in is voluntary use of our standards because we don't need regulators to tell us what to do. Some companies want to provide information to the market. They want to attract capital so they may choose to report even if they're not told they have to. And many investors are encouraging their investees to provide this information because they need it for decision making. So, a really important complement to these regulatory conversations that we're involved in is the conversations we're having with companies, with the World Economic Forum who have forums of companies with large investors explaining to them why our standards are important. And we're seeing a really high level of interest in those choosing to use our standards as well, which is just as important to us. I don't really care whether a company is using our standards because they've been told they have to or because they've decided it's a good idea as long as the standards are used and that information is out there in the market. So, we've got a dual track going on in these conversations.
Jane: [00:09:34] So, the message quite clearly is to companies. You don't need to be told to start using the standards. Actually, you know, anyone can just get started straight away. These are published standards now, so crack on and get on with it.
Sue: [00:09:49] Available for use.
Jane: [00:09:51] Yeah. Well, I for one, have been reading and rereading the standards, I might say, just to just to get very familiar with them and I think it's really about making sure that companies not only are thinking about these standards are for okay let's see what we can disclose, actually think they provide a really useful framework for the way in which companies could be managing their sustainability risks and opportunities because you know, just I'm a kind of massive fan of kind of this idea that disclosure shouldn't be for the sake of disclosure. It should be for the sake of improving what we do, reducing our impact on the environment, making more inclusive societies, etc. You know, it really to not lose sight of the fact that actually this is all supposed to be to have a good outcome and to make sure that, investors are making capital allocation decisions and businesses are making the right kind of business decisions so that we're kind of properly factoring in these risks and opportunities. So, I did want to ask about another kind of element here, which is the European work on kind of sustainability disclosures, because I know that's creating a lot of head scratching for companies who are affected by CSRD. Can you just talk us through a bit about the interoperability of ISSB and CSRD and how these two things should be thought of by companies?
Sue: [00:11:13] Absolutely Something I've spent many hours of my life thinking about in the last year. I will go back a step. In an ideal world, what we would love jurisdictions to do is to use our standards, ask for the information in our standards, and then if there's additional information, they need to sort of add that on top. We call that the global baseline and the building block approach. That's nice and straightforward and relatively speaking. We've got a more complicated situation in Europe because to Europe's credit, they were first movers in this area. And so even before the ISSB was born, they were busy drafting their sustainability disclosure standards. And so, we've got this complicated situation where we've come along second, Europe does want to be aligned with us, but we've got a timing challenge and also, they've got a broader mandate than us. We're very focused on meeting investors information needs. They also need to meet public policy needs and their European compliance requirements as part of the Green Deal. So, there's more information they ask for, but there's commonality as well. So, we're trying to back solve for that to make it as efficient as possible. So, our objective here is to make it possible for a company who needs or wants to apply both the ISSB's climate requirements and ESRS requirements to be able to do so in a way which reduces the costs and duplication in reporting and reduces the potential confusion of similar but slightly different information being provided. I'll use an example. Can you imagine if we were both asking for scope three greenhouse gas emission information, which we are by the way, but we asked for slightly different calculations, costly and confusing, which is true. And so, what we've been doing in the last six months or so is spending time to make sure that we have a situation where, where we ask for similar information, you can provide the same information both to meet our requirements and the European requirements. That's our dream. And we've spent a lot of time on that so called interoperability. So, we're delighted that we've managed to move ahead a lot on that. And what that means for a company would be that you could provide information to meet investors information needs consistent with the ISSB requirements. And in so doing, those same disclosures can in part meet your compliance obligations in Europe. And that's the design that we're working very hard to achieve. And we're hoping to be able to agree with Europe, in our ongoing conversations, to be able to actually publish for the market to see how we have assessed this interoperability. So, it's really clear for a company how to achieve that dream of being able to meet both sets of standards in a really efficient way.
Jane: [00:13:48] Yeah, I think that would be a much needed translation, if you like. Because I know that lots of companies are looking for a way to disclose the information that people need in the market, but not to get bogged down in so much bureaucracy and detail that it becomes a bit nonsensical. So, anything that can help to translate those disclosure requirements would be much needed and very welcome for sure. Kind of going on with this theme a little bit on the CSRD and ISSB is around, and you mentioned it about the primary purpose of, each of these approaches. So ISSB is all about thinking about the information which may be relevant to a company's financial prospects. Can you tell us how? Well, number one, confirm whether that's correct in my assumption or in my understanding and then how that differs to say CSRD which is looking at a much broader interpretation of sustainability.
Sue: [00:14:46] Sure. So, from our perspective, yes, you're right. We're interested in the information investors need to inform their investment decisions. And in particular, what we're interested in is information that could affect an entity's prospects, which is its future cash flows, its business model, its cost of capital and its ability to raise finance. So, anything that could affect that is what we're interested in. And I think one thing that's really important to emphasize in that is that there's quite a range of information that is relevant when you have that perspective, including, by the way, the impacts that a company has on people, the planet, and the environment, which is something that sometimes confuses people. And that's because, for example, if you have got a business where there's a lot of greenhouse gas emissions, you may well be subject to regulation, which means you need to change your business model and invest in particular equipment, etc, to really get those emissions down, to meet regulatory requirements and your customers and your employees care about the way that you behave. So, things that you're doing that impact people, the planet and the economy can really be relevant for investors. And that's really important. That means that there's actually a lot of commonality in our focus on meeting investor information needs and the broader focus of the European requirements, which are also interested in meeting information needs of investors. And they use very similar language to us now as a result of our interoperability work when they focus on that, But they also ask for information about impacts that is of interest to a broader range of users of information, including business partners, academics, NGOs, and others. And it's that can create some differences sometimes, and sometimes it's public policy information or things that are needed for a regulatory requirements. So sometimes there's pieces of information in ESRS that are needed because of aspects of the Green Deal that are very specific to European legislation. So that's where that difference can come in. And also, for me, it's a question sometimes of granularity. At the end of the day, the information we ask for has to be so important that it could be reasonably expected to actually influence an investment decision if that information was missing. So, it needs to be relatively big deal. That could be slightly different to the granularity of information that could be of interest to a particular business partner or an NGO or a civil society, which is where the European differences can come in. So, for me, it's not so much about is it impacts or not, which is often where the confusion comes in and where the conversation is conducted. It's about this granularity point. And what we really want to make sure is that the information we ask for sits well next to the financial statements, which also are focused on that information that could really be reasonably expected to influence an investment decision. And that's for me, where the real differences can arise.
Jane: [00:17:42] And then in terms of timeframes, because as you're talking, it all makes perfect sense. But then inside my mind, I'm thinking, well, there are so many sustainability issues which could potentially impact a company's prospects, but it depends over which timeframe you're looking. So, can you talk to us about what people should be thinking in that context?
Sue: [00:18:02] Well, we talk about short, medium and the long term, and actually our wording on that is very, very aligned with Europe on that. So, we aren't only interested in the short term, and I think this is a really, really important factor for sustainability reporting relative to the traditional financial statements. You do need to be thinking about longer term effects when it comes to climate and other things to think about what information investors need. And so that isn't really a source of difference per se. And so that's common to both perspectives really.
Jane: [00:18:31] And in terms of thinking about what constitutes short term versus long term, is there a consensus around that or is that down to the individual company to dictate what they’ve consider to be short versus long term?
Sue: [00:18:43] We don't define what short, medium and long term means. I think really for me the main point is don't have an artificially truncated sort of outlook period and say I can ignore everything past this point in time. That would be my main message to people. And then when it comes to actually describing what you have interpreted as short, medium, and long term as a company, it is what the company should determine as appropriate, and they then need to explain what that is. And that's by design, because what's short, medium, and long term could be very different depending on the industry that a company is in. And so, we want this to be relevant information that's really meaningful and for investors. And so, part of that is making sure that when you come to thinking about short, medium and long term, it makes sense given the business that you're in and, for example, that it ties in well with how you do your planning internally. So that that's why we've taken that perspective.
Jane: [00:19:33] So Sue, can we talk about the scope of sustainability reporting? Because that's what sometimes I think people find quite difficult to get their head around is it could be everything and anything but this year you've published S1, which is the standard on general requirements, and you've also published S2 on climate specifically. So, can we talk about that boundary issue of what's potentially in the remit of this sustainability reporting? And are there any more issues, specific standards that you've got in the pipeline?
Sue: [00:20:04] Sure. And I'll start firstly with a comment on S1 and then I'll get to your specific question if that's okay. So firstly, S1 you're right, does have an instruction which basically says provide information on all of your sustainability related risks and opportunities that could be reasonably expected to affect your future prospects. And by design, that's described in quite a broad way. So, it doesn't limit the things that can be addressed. And I'll come but I'll come back to that in a second. The other important thing that S1 does, though, that is important, even if you're only are reporting on climate, which, by the way, you are allowed to do in the first year, use our standards, you can just report on climate is S1 tells you things like that the information should be provided at the same time as the financial statements and as part of the general purpose financial reporting package. It tells you how to think about the investor information needs and things like what to do if you make an error or what to do with comparatives. So, it sets up the sort of the plumbing almost for the reporting system. And then it goes on to cover this really important point about the scope of the requirements. Now, what we have done there is we've got quite a broad scope. But I think what's important to note is that we also give you a clue about the types of things to report on. And the strongest clue we give you is that you should have a look at you don't have to use them, but you should have a look at it and give careful consideration to the Sustainability Accounting Standards Board standards, the SASB standards that are now part of the IFRS Foundation. And they're a really useful resource because they set out by industry the sort of things that the SASB identified as being really important for investors. So, I think they give a really good steer about the types of things to report on, and it's not everything you can imagine. It is the stuff that really, really matters for a particular industry. So, I'd recommend using those to think about the scope of S1.
Jane: [00:22:00] But presumably they're a starting point and it's not necessarily going to be limited to this SASB standard, but it's a good starting point.
Sue: [00:22:09] It's a good starting point to sort of frame your thinking. And also, I think the other really important thing it’s stuff that can be reasonably expected to influence investor decision. So, it should be things that are that are really important. And my sort of expectation would be the sorts of things that are well-managed company would be thinking about as their risks. They need to think about should frame your thinking for applying the standards as well. Now we've come out, of course, with S1 and S2. So, we've set out specific disclosure requirements for climate in the first instance because the market said climate first, not climate only. So that's our main anchor now, but we're already thinking about which specific standards should we focus on next. And so, we did an agenda consultation that finished on the 1st of September where we've asked all of our stakeholders what you think we should work on next, and we'll make those decisions in the first half of next year. But just to give you a clue, the main candidates that we put out for comment were biodiversity, ecosystems and ecosystem services, human capital. So, for example, diversity, equity and inclusion, human rights. So, for example, how workers in the and your supply chain are treated or how you're dealing with the rights of indigenous people. And then a fourth project which was whether we should work to further integrate the reporting between financial statements and sustainability reporting. So that gives you an idea of the natural candidates that we might be thinking about when we make our decisions on future specific topics, where we would set out a standard that's similar to S2.
Jane: [00:23:36] That's really helpful. Thank you so much. And one other thing I wanted to ask you about was how the ISSB standards fit in with or complement work that's coming through on climate transition plans in terms of setting out guidance. So, for example, transition plan task force, etc, that are setting out guidance. So how do those things fit together?
Sue: [00:23:59] Yeah, it's quite a complicated jigsaw puzzle, isn't it? I would describe the work of the UK Transition Plan Task Force and Gfanz work on transition plans as being very complementary to our work. And what do I mean by that? We ask for information about a company's transition plans and set out the sorts of information that we would be interested in understanding. So, if you have a transition plan you need to provide information about it is essentially what S2 says. That then works really nicely. If I look at the UK TPT as the as a compliment in two ways. Firstly, the transition Plan task Force has set out what you should think about when you put together a transition plan and so therefore a transition plan that you put together using their guidance would be the thing you would report on if you're using our standards. So that's one complement. And then the other thing they've done is they have spelled out a little bit more detail, some specific information about a transition plan they think would be useful to disclose. And so, it builds on and enhances the requirements we have in S2 about transition planning with some more specifics about the type of information about transition plans that would be useful to provide. So, it's a really nice piece of the jigsaw to hum a few more bars on transition plans that complements application of S two.
Jane: [00:25:20] That's really helpful. Thanks for the distinction there. It's it does make sense when you say it so eloquently like you just did. Let's, finish up Sue with an opportunity just to reflect actually because the last few years for you must have been an absolute whirlwind. And I'm just curious, when you, when you basically pull off something like ISSB has in at such kind of warp speed, what from a from a personal and professional perspective, are you looking back? What lessons has it taught you or what reflections do you have about what you've been doing?
Sue: [00:25:52] Well, firstly, I feel very fortunate to be part of the journey. I think it's a really exciting time in the market for financial reporting. I mean, we haven't seen, I think, such a sea change in financial reporting for a very long time. So, I do stop every now and then and think, wow, this is a really exciting moment and it's good to enjoy and be part of it. And for me, what's really striking is the pace of change in this area. And I think the other thing is remembering how new it still is. And we're all learning together. And so, I think the thing that I constantly remind myself of is how steep my learning curve has been in the last couple of years on this journey and being empathetic to what it's like for other people, but also really encouraging people to just get involved and help shape this because it really is an opportunity where those who are engaged can really shape the way that things develop. And I think we're doing something a really exciting moment to really find a nexus between financial reporting and financial markets, which is something I'm always very interested in, but that really fits in well with broader issues that are so important for society. So, I think it's a really exciting moment and just keep reminding myself, you know, when I have a spare moment, how exciting and important it is and really encouraging people to get engaged.
Jane: [00:27:05] Yeah, absolutely. Well, I couldn't agree more. It's a very exciting time. And I think, earlier you talked about companies just starting to engage, starting to think about the standards, understand what it means for them and start adopting them. So, let's hope many companies do that. And then soon the ISSB standards will just be our normal way of communicating to the market. Sue, thank you so much for your insights and your time. Like I said, you're a very busy lady, so thank you. We really do appreciate the time that you've spent with us today. And I'm sure our listeners will be really interested to hear what you have to say. So, thank you once again, and we will see you soon.
Sue: [00:27:47] Thank you so much.
Jane: [00:27:49] So that's it for this week's episode of the LSEG Sustainable Growth Podcast, which I hope you found as insightful as I did, and a big, big thanks to Sue for sharing her experience with us. If you're not already following us, then please do. And don't forget to rate us on Spotify, Apple Podcasts, or any other platform. If you've got questions, comments, or someone you'd like us to talk to, then do get in touch by email at fmt@lseg.com. That's all from me but watch out for the next episode very soon.
