Consolidating the Crowded Sustainability Reporting Landscape

Katie Schmitz Eulitt:

The value reporting foundation really aims to support the IFRS trustees. As they've intended to move forward, following their consultation, we're ready to engage with them. IOSCO, EFRAG and others that are working towards global alignment on a corporate reporting system. The work of the Group of Five really was maybe a warm up. You can think of as getting ready for this big event or big movement, if you will. Now, that the IFRS trustees are weighing in.

Michael Torrance:

Welcome to Sustainability Leaders. I'm Michael Torrance, chief sustainability officer with BMO Financial Group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic and NGO communities. To explore how this rapidly evolving field of sustainability is impacting global investment, business practices and our world.

Legal disclaimer:

The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or it's subsidiaries. Hi, I'm Whitney McWade, director of sustainability strategy, disclosure and impact at BMO. Today we'll be talking about the evolution of corporate reporting in a world where corporations are increasingly expected to manage their businesses in the interest of a wide array of stakeholders. Groups like customers, communities, employees, NGOs. As well as of course, shareholders. It's in this context that transparency and accountability of sustainability performance is now considered to be a fundamental part of business management. And essential for understanding the value a company brings to society and the impacts it has on its various stakeholder groups. Impacts that can be economic, environmental and social in nature.

Whitney McWade:

The sustainability reporting landscape is complex, with many reporting standards and frameworks that each serving a unique purpose and audience, and approach sustainability disclosure from slightly different angles. This reality means that publishing sustainability information that is meaningful can be resource intensive for companies. Without consistency in which standards or frameworks issuers use or how they apply them. The investor community cites comparability of these disclosures as a challenge to the usefulness of the information, highlighting the need for a clear and comprehensive sustainability reporting framework.

Whitney McWade:

Over the past six to nine months, we've been starting to see a shift in this space, whereby the big players in sustainability reporting, the likes of; the Global Reporting Initiative, the Sustainability Accounting Standards Board, the International Integrated Reporting Council, CDP and others. Now seem to agree on this need for convergence. In September 2020, published a statement of intent to work together towards a comprehensive corporate reporting system and committed to collaborating to achieve that goal.

Whitney McWade:

Following that, the IFRS Foundation published a consultation paper on sustainability reporting to determine whether there is a need for global sustainability standards. Whether the IFRS Foundation should play a role and what the scope of such standards could be. We have since heard that the project will be going forward and an international Sustainability Standards Board, or SSB, will be established.

Whitney McWade:

Today, I'm talking to Maria Theofilaktidis and Larry Leva, from the IFRS Foundation. And Katie Schmitz Eulitt, with the Sustainability Accounting Standards Board. To talk about the flurry of activity that we've seen in the sustainability reporting landscape. Maria and Larry are trustees of the IFRS Foundation, they join me to discuss the IFRS's work and the potentially hugely influential role it could play for sustainability practitioners and users of sustainability information.

Whitney McWade:

Maria and Larry, thanks so much for joining us today. To kick things off, can you each tell us a bit about yourselves, your careers and how you came to be involved in this work? Larry, maybe we'll start with you?

Larry Leva:

Okay. Thanks, Whitney. And Good day everybody. I'm starting my second three year term as an IFRS Foundation trustee. I serve on a number of committees, I chair the Audit, Finance and Risk Committee and also serve on the Due Process and Ethics Committees. Relevant for today's discussion, I serve on the Sustainability Reporting Steering Committee.

Larry Leva:

Just some additional background, I retired from KPMG after 40 years with the firm, back in December of 2018 and served in a number of senior leadership positions over the years. With my last 12 years serving as vice chairman of KPMG international, responsible for quality, risk and regulatory. I got involved in this area, Whitney, through my work on the IFRS Foundation Sustainability Steering Committee. It's really been eye opening to see how much good work has been done by the existing sustainability standards setters. But at the same time, to see how the level of actual sustainability reporting is so fragmented and inconsistent. I am really happy to be involved in such an important initiative. Maria?

Maria Theofilaktidis:

Thanks, Larry. Well, I actually was nominated as a trustee of The IFRS Foundation just over a year ago. I'm honored actually to be the Canadian representative on the foundation. I am on the Finance and Audit Committee and the Ethics Committee of the foundation as well. I came into the foundation just as it was embarking on its strategic review and analysis of the sustainability role that it wants to play. While I have been involved in ESG reporting as part of my career, I actually have been very excited to learn more about this critical area as we proceed forward with the foundation on this topic.

Maria Theofilaktidis:

As far as my background goes, I'm actually currently executive vice president of finance here at Scotiabank in Toronto. I am a chartered accountant by background, so maybe accounting standards are in my DNA a little. I have spent my career, which is over 25 years, primarily in financial services here in Canada as well as in South Africa. I've been in various senior roles across many areas in the bank, I've been in external audit. But also internal audit, finance, capital management, risk management, retail banking and compliance. So, very broad experience across the banking spectrum.

Maria Theofilaktidis:

Previously, actually, I was a member of the Preparers Forum at the IFRS Foundation when I was Chief Accountant of the bank. That is one of the many key stakeholder bodies of the International Accounting Standards Board, which really gave me insight into the governance and due process of the IFRS Foundation.

Whitney McWade:

Fantastic. Lots of very interesting and relevant experiences from you both. So, looking forward to hearing your insights on the SSB or Sustainability Standards Board. But first, can you describe for us what the IFRS Foundation is, what its role is in relation to corporate reporting and the role that you both play as trustees?

Maria Theofilaktidis:

Well, the IFRS Foundation is a not for profit, public interest organization. It was established to develop a single set of very high quality, understandable, enforceable, globally accepted, accounting standards. These are the International Financial Reporting Standards or IFRS, as they're commonly known. These IFRS standards are actually set by the independent standard setting body of the foundation and that is the International Accounting Standards Board or IASB.

Maria Theofilaktidis:

Currently, IFRS standards are actually mandated in more than 140 jurisdictions across the globe and are permitted in many more jurisdictions. The mission of the foundation is to develop these high quality transparent standards, to ensure accountability and efficiency for financial markets around the world. We serve the public interest, it fosters trust [inaudible 00:07:53] in the markets, it enables investors and other market participants to make informed economic decisions.

Maria Theofilaktidis:

Obviously, through that process, facilitates efficient capital allocation. Larry and I as trustees of the IFRS Foundation, we're one of over 20 globally represented trustees. Our responsibility is really the governance oversight and strategic direction of the foundation and the International Accounting Standards Board, in and of itself. We don't create the standards, we just ensure that there's appropriate governance and oversight in their creation.

Whitney McWade:

Got it. This role with, in regards to strategic direction, is very relevant to what we're talking about today. In relation to sustainability reporting. How did the IFRS Foundation first become interested in sustainability reporting and what has the journey that led to the creation of the Sustainability Standards Board look like?

Larry Leva:

Whitney, the trustees of the foundation performance strategic review every five years. It's an opportunity for us to consider big picture of public interest issues and sustainability reporting clearly falls into that category. The last couple of years, sustainability reporting has just received an incredible amount of attention. Investors and other key stakeholders, including regulators, were increasingly calling for a global set of sustainability standards. Many of those same voices were increasingly looking to the IFRS Foundation to get involved.

Larry Leva:

I should note that the existing sustainability standard setters have done an incredible job. But the challenge is that there are a number of standard setters that are out there and the disclosures by companies are voluntary. A common criticism is that companies can pick and choose what standards they want to comply with and the level of compliance. As a result, there have been increased calls from investors and others, for greater comparability and more consistent application. Particularly, at a global level.

Larry Leva:

Going back some 20 years, the development and widespread mandatory adoption of IFRS standards fulfill that role for financial reporting. Many have suggested that the IFRS Foundation can and should play a similar consolidating role in sustainability reporting. As a result, we issued a consultation paper, the foundation issued a consultation paper at the end of September. With a three month comment period to the end of the year. The paper sought feedback on three things really, is there a demand for global sustainability reporting standards?

Larry Leva:

Second, whether the foundation should play a role? Third, what role might that be? We included a possible option of forming a new Sustainability Standards Board that would sit alongside the IASB, that Maria referred to, within the foundation's governance structure. We set out the conditions that would need to be met for us to be successful if we were to set up a new sustainability award.

Larry Leva:

We would need support from the right authorities and regulators. We would work with existing initiatives, jurisdictions, existing standard setters, to achieve consistency and reduce complexity. Very importantly, we would need appropriate funding. Today, the foundation is in good financial condition but the reserves that we have are mandated to be used for financial reporting, for the work of the IASB. We can simply take that money that was contributed for a specific purpose and start using it for something else. We're going to need to raise the appropriate funding for a sustainability reporting if we're going to be able to move in that direction.

Larry Leva:

In terms of responses to the consultation paper, we received almost 600 response letters from a diverse group of stakeholders in organizations and individuals around the world. Those responses indicated broad demand for global sustainability reporting standards, broad support for those standards to have an initial focus on climate change disclosures. With strong recognition that urgent steps need to be taken. Finally, a broad demand for the IFRS Foundation to play a role.

Whitney McWade:

Thanks, Larry. You mentioned the number of standard setting organizations out there already, in this IFRS initiative, joining an already crowded sustainability reporting landscape. I mentioned in our introduction that the five big players in sustainability reporting published a statement of intent, committing to work more closely together. There's this trend towards convergence of the various sustainability standards setting institutions. From your perspective, Maria, how important is that piece of work, to meeting the demand for sustainability information? How does it fit in with the IFRS initiative that Larry described and which stakeholders do you view as the main beneficiaries of the outcome, which is more comparable and consistent disclosures?

Maria Theofilaktidis:

I think the convergence work is critically important. Currently, as Larry said, there's a wide range of voluntary frameworks and standards that are [inaudible 00:13:29]. From the Preparers side, they're faced with opting to report using all these multiple standards matrix and frameworks. To be quite honest, the view is that the results have limited effectiveness and impact. There's a high risk of complexity and clearly ever increasing cost. From the users of the information, it also creates a lack of consistency, transparency and comparability.

Maria Theofilaktidis:

There is an urgent demand for convergence. The view is that delays to creating that global coherence. In particular on pressing issues like climate related disclosures, will actually increase the threat of fragmentation. Therefore, not really engaged the capital markets to help move to a better ESG reporting, to transition to low carbon economies, et cetera. As you see people starting to commit to target dates, in particular around climate, where we're all committing to net zero emissions. The reporting standards can actually then play a vital role in assessing and assisting in meeting and monitoring those targets.

Maria Theofilaktidis:

Clearly, hugely important that there's convergence. That's where an international sustainability reporting standards board can be of assistance, is helping to bring those together. When you look at the stakeholders side of things, I think it's quite clear that there's a huge group of stakeholders that can benefit from more compatibility and consistent disclosures. It depends on what your interest is, whether you're looking at it from the perspective of an investor, where you want to understand all the material issues that impact enterprise value creation. Or whether you're interested in the broader impacts on the economy, the environment or people in that context.

Maria Theofilaktidis:

From the IFRS perspective though, as we've published in our public statement on March 8th. We really did share our view that from a strategic direction perspective, a new sustainability board would target the investor focus. Really looking at reporting on items that are material to enterprise value creation. Which is aligned with many of the Alliance participants but not all of them. Of course, we know that the idea of who an investor is is changing, right. When provided the right information, investors can be the change agents and lead to proper capital flowing to sustainable companies and activities. Which is the object of many of these organizations.

Maria Theofilaktidis:

The reason the IFRS landed on the investor focus was really that it is the foundation's DNA. It's where our legitimacy lies, is where we can add the most value in the sustainability reporting space, in our view. It's [inaudible 00:16:15] our mission to facilitate efficiency to financial markets and serve the public interest. We do recognize, though, that there's a lot of interdependence between the information that captures expected value creation, which is what investors look at. As well as the other side of it, which is the value creation for society and the environment.

Whitney McWade:

Building on that, Maria. How would the SSB interact with those well established institutions like the GRI, [inaudible 00:16:46], IRC? As well as some of the more recent activity in a sustainability reporting space. I'm thinking, for example, of the World Economic Forum's paper on measuring stakeholder capitalism. Which provides another reporting framework that's essentially a curated set of metrics from those more well established organizations. How do you see that fitting in with the ultimate output or goals of the IFRS Foundation's work in this area?

Maria Theofilaktidis:

Well, we've been quite public that interaction with these key existing initiatives is actually vitally important. The goal is not to reinvent the wheel, we recognize that we need to build upon the progress already made. Because, that's essential in helping us to meet the urgent need, right. The speed will be compromised if we start from scratch. A new board would work very closely with the existing sustainability reporting initiative so we can find the quickest and most effective route to reduce complexity.

Maria Theofilaktidis:

We've also been quite clear in our public statement that the new board would work with the framework of the financial stability boards task force, on climate related financial disclosures. As well as all this work that's been done on the convergence with these leading standard setters, in sustainability reporting. Clearly, we want to consider an alliance approach. In particular, when it comes to climate related disclosures. We've already initiated a process of structured engagement with all of these relevant organizations, they have to be part of our journey.

Maria Theofilaktidis:

With the World Economic Forum, we're in frequent contact and working to ensure we have good alignment across our respective work streams. I think the message here is that we will continue to engage with existing groups and move forward together, to ensure we have a running start.

Larry Leva:

Yeah. Whitney, if I could add. It's important that we are not in competition with those existing standard setters. It's also important to note that the WEF with, obviously, the International Business Council and the large firms that work to develop those disclosure requirements for the WEF. As well as the standard setters in this space, have all come out and been very supportive of the idea of the IFRS Foundation getting involved in setting up a new Sustainability Standards Board and looking to help us.

Whitney McWade:

Fantastic. You mentioned one thing about speed. We understand that the need for a more comprehensive reporting framework is urgent. But I can imagine that the process of developing a standard takes time as you conduct in depth consultation, integrate feedback from multiple stakeholders. When you start to think about the huge variety of ESG topics that issuers report on, the idea of developing standardized disclosures for each of those could become a bit of an overwhelming task. We know that the IFRS will focus its efforts initially on developing a climate related disclosure standard and [inaudible 00:19:46] expand to other ESG topics over time. But Larry, how do you see that playing out in the short and medium term?

Larry Leva:

Well, Whitney, climate change has been identified as the area of greatest near term demand. Not only through the responses to the consultation paper. But before then, we had a taskforce that was set up that we did significant outreach. Again, the feedback, very consistent. Most important, most urgent need is climate change disclosure. We will initially prioritize climate change related disclosures. The good news is, a lot of progress has already been made on the climate change front of sustainability reporting.

Larry Leva:

Indeed, it's among the most developed of the ESG areas. Meaning, a new board can really hit the ground running. In terms of medium term, I note that IOSCO has proposed the establishment of a multi stakeholder expert consultative committee within the IFRS Foundation structure. And we support such a committee, as it would help the new SSB to identify and prioritize the most urgent and relevant sustainability topics that would follow climate change.

Larry Leva:

We have a very well developed due process system that we have used at the IASB. When you are developing standards for a global audience, it's really important to make sure you're getting input from around the world and we will do that. It's one of the most important reasons that people look to the IFRS Foundation to get involved in sustainability reporting. Because, we have that global credibility, we have that relationship with the regulators, IOSCO.

Larry Leva:

One of the challenges that the existing standard setters have is, the regulator's have not mandated the disclosure requirements. And IOSCO, again, very supportive of the IFRS Foundation initiative. The hope is, that will help speed up comparability consistency by mandating disclosures in key jurisdictions.

Whitney McWade:

Yeah. We've seen a lot of work happening with regulators, contemplating how these disclosures can or should be factored into [inaudible 00:22:18] company's regulatory filings. One of the ways that the existing sustainability reporting frameworks and standards diverge, is on their definition of materiality. The consultation paper released by the IFRS Foundation makes a distinction between single and double materiality. Larry, can you explain those two concepts for us and which approach is the SSP leaning towards?

Larry Leva:

Let me use climate change as maybe the example. The concept of single materiality would focus on the impact of climate change to the reporting company. You can think of an insurance company, property insurance company, that has to consider its insurance premiums for properties by shores. Where global warming and the level of the oceans might be increasing over time. And so, the impact of climate change to the reporting company. The concept of double materiality would be the impact of the reporting company's operations on climate change to the broader environment. Examples there would include fossil fuel companies and how those operators impact the broader environment.

Larry Leva:

Some have argued that single materiality is too focused and only focused on investors. Whereas, double materiality's focus would be of interest primarily to policymakers and other stakeholders, and not necessarily to investors. But the more you think about it, the single and double materiality are very conceptual terms. The more we discuss these areas with folks at IOSCO and others, the more we see that the choice of single or double materiality is not really a black and white choice of one or the other. Existing standard setters, in fact, working together have coined the concept of dynamic materiality. Which over time, issues that relate to a company's impact on the environment will also have a direct bearing on the company itself. As a result, on its financial reporting.

Larry Leva:

By, for example, potentially an impairment of an asset or by the need to recognize a liability. As Maria mentioned, our current focus is on information that is relevant to enterprise value creation or disruption, as the case may be. Which captures expected value creation for investors in the short, medium and long term. And is interdependent with value creation for society and the environment more broadly.

Whitney McWade:

That question about materiality was one of the key points of consultation in the consultation paper. Maria, can you share with us any other feedback or topics that you receive feedback on as a result of that consultation paper?

Maria Theofilaktidis:

We've covered a lot of the actual output. At the end of the day, Larry shared with you the key points in the consultation paper, which was around demand and the IFRS role in that demand. We got over 570 comment letters and they came from a very diverse set of stakeholders; groups, organizations, individuals who chose to comment back. All of these are actually available on the IFRS website. What is clear across all of these comment letters was broad support for global sustainability standards. There's really an urgent need, very strong recognition for that.

Maria Theofilaktidis:

In addition to that, there was a broad demand for the IFRS Foundation to play a role quite clearly in this context. That was supported further by a statement from IOSCO in that context. As a result of that demand, the trustees have already decided in February to move forward, to do more analysis, figure out what exactly needs to be done in order to establish a new board. We're moving towards the establishment of an international sustainability reporting standards board, within the existing governance structure of the IFRS Foundation.

Maria Theofilaktidis:

Based on the assessment of the feedback and our mission, the strategic direction has been set. Like we said, investor focus focused on enterprise value. It has got the sustainability scope, that was one of our questions, but prioritizing climate first. Build on existing frameworks that also came through. In the feedback, people want us to get a running start and that is our intention.

Maria Theofilaktidis:

Lastly, using a building blocks approach, right. Let's build this global standard and then allow flexibility to build on that as we move forward. Really, the feedback was just support of the steps that we are already taking on, moving towards the rest of the year.

Whitney McWade:

Fantastic. We know the SSB will be created, will be established. What are the next steps then, what should we all expect to see over the coming months?

Larry Leva:

Well, we continue to work on the key success factors that are laid out in the consultation paper. Most importantly, including getting support from key jurisdictions for our building block approach, to sustainability reporting. Utilizing that global baseline from a new SSB, which would drive greater comparability consistency. And very importantly also, as I mentioned earlier, to obtain appropriate funding. Without the funding, we really can't go very far.

Larry Leva:

We'll also need to consult on changes to the IFRS Foundation constitution. This is a necessity for the foundation to expand its scope. Such consultations require a minimum 90 day comment period, so we're working on that as we speak. We need to continue to engage with leading sustainability standard setters, to see how a new SSB can make use of their existing human capital expertise, climate change content, to allow for us to have a running start.

Larry Leva:

We want to continue to work with IOSCO to create that multi stakeholder committee, to guide a new SSB on priorities after climate change disclosures. Finally, we want to keep on track to make a final determination on a new board, in advance of the UN COP26 Climate Conference in November, 2021.

Whitney McWade:

Lots of work ahead. Maria, Larry, thanks very much for taking the time to share your insights with us today on this rapidly evolving topic.

Maria Theofilaktidis:

Thank you very much Whitney for including us. This is a critical area and we're actually very excited to be part of this global journey.

Whitney McWade:

Shortly after the IFRS Foundation published their consultation paper on sustainability reporting, two other entities announced their intention to merge into a unified organization called the Value Reporting Foundation. Those two organizations are the Sustainability Accounting Standards Board, known as SASB. And the International Integrated Reporting Council, known as the IIRC. Katie Schmitz Eulitt is the director of investor outreach at SASB and she explains why the two groups decided to merge and the role the Value Reporting Foundation is expected to play as we transition into a new reality of sustainability reporting. Including, by supporting the IFRS trustees in their work by providing building blocks for the Sustainability Standards Board. Thanks so much for joining us today.

Katie Schmitz Eulitt:

Thanks for having me. It's great to be on the line with you Whitney.

Whitney McWade:

To start things off, can you tell us a bit about your background and the accountabilities of your current role?

Katie Schmitz Eulitt:

Sure. I've been with SASB since its inception and have worn many hats, including the beginning of our work, bringing together our industry working groups. Who really helped us formulate and vet the standards, which are now codified. I now work primarily with our industry advisory group, which is now comprised of 57 members of asset owners and asset managers around the world, with over $42 trillion in assets. Who are among the strongest supporters of SASB in our growing SASB alliance. That Alliance has over 200 members in it and we're just continuing to see growing industry support for our work.

Whitney McWade:

Fantastic. Let's start with a statement of intent that I mentioned in the introduction. That paper was put out by five framework and standards setting institutions last fall. Which frameworks and standards were involved in that work and what prompted you all to get together?

Katie Schmitz Eulitt:

Great. Yeah, that was a pivotal moment. The five groups that were involved were leading standards setting institutions and frameworks of international significance; CDP, CDSB or the Climate Disclosure Standards Board, GRI, the International Integrated Reporting and SASV. We came together to address growing calls for rationalization of the ESG disclosure landscape. In addition to that, our aim was to really help resolve market confusion. Because, there is a vast array of standards and frameworks in the marketplace.

Katie Schmitz Eulitt:

We really wanted to begin to provide joint market guidance on how our frameworks and standards can be applied in a compatible and additive way. To demonstrate a commitment to working together toward a coherent, comprehensive, corporate reporting system. And to begin to provide a common language, as well as visuals, to help design end to end state system of disclosure standards.

Whitney McWade:

What is that vision for an end state system or a comprehensive reporting system and what role will each of those players play in that future state?

Katie Schmitz Eulitt:

Yeah. It is complicated. I think one of the most valuable things to emerge from this statement of intent, from the Group of Five, was a clear articulation of the nature of materiality. That it's not this or that, it's dynamic. And that sustainability disclosure serves many purposes and multiple users. Because of that, there isn't a single standard or framework for sustainability or ESG related disclosure, that meets the needs of all audiences interested in the information.

Katie Schmitz Eulitt:

That common language and those visuals that I talked about earlier, one of the most important things was this graphic of nested and dynamic materiality that was included in the statement of intent. It really was intended to provide a big picture view of the relationships between our standards and frameworks. At a high level, mapping out how the frameworks and standards see ourselves fitting into a nested ecosystem. Addressing the dynamic nature of materiality and a variety of stakeholders.

Katie Schmitz Eulitt:

When I say materiality is dynamic, I mean that matters of importance can move between different parts of the disclosure ecosystem over time. For example, our society becomes aware of an issue such as climate change, interest in disclosure of carbon emissions enters the disclosure landscape. First in the big outer box or the big picture if you will, of the nested materiality graphic. Then as investors start to factor into capital market pricing, the cost of transitioning to a net zero economy for example. Emissions disclosure moves into the middle box of the graphic.

Katie Schmitz Eulitt:

Because, it's part of enterprise value related investor decision making. And then you can envision emissions over time, emission disclosure eventually migrating into the smallest or innermost box in the graphic. As the financial consequences of a transition to a low carbon economy impact net asset values captured in traditional financial disclosures.

Whitney McWade:

The nature of how a topic can be material to an organization can change over time and the five organizations that we're talking about here define materiality in different ways. How do those five organizations see themselves working together in that future state that we're envisioning? What will be the role that SASB play, versus the role that the IIRC will play?

Katie Schmitz Eulitt:

Right. I'll answer that in a couple of different ways. We don't all five have different definitions of materiality, I would say that there are two camps. One that is really looking at what you would call, perhaps, impact focused materiality. What are the impacts of a company's activities on the world and society. GRI and the WEF/IBC metrics fit into that outer box. SASB, CDSB and IIRC are focused on financial materiality and enterprise value creation or destruction. So, we're in that middle box.

Katie Schmitz Eulitt:

We have mapped out how companies can report and we ourselves are working towards building a system that is more interoperable. So that when issues migrate from one part of the graphic to another, which is an overly simplistic way of thinking about it. We're talking about things using the same language, using common terminology. So that a reporting entity isn't having to talk about things in different ways. We're trying to converge around a common language for communicating around these things.

Whitney McWade:

That makes sense. You mentioned the SASB standards and the IIRC's integrated reporting framework, both use this view of materiality as financial materiality or enterprise value creation. It's those two organizations that have now merged to create what's been called the Value Reporting Foundation. Can you tell us a bit about what was the impetus behind that merger, what's the status of that work today and how do you see that playing out?

Katie Schmitz Eulitt:

Right. I would say that through our work with the Group of Five, one of the things that was really obvious as I mentioned, was that some of us were more like each other than others. In response to global market demands for convergence of ESG reporting frameworks and standards, which we're hearing all the time. In November of last year we announced that we intended to merge into a unified organization, the Value Reporting Foundation.

Katie Schmitz Eulitt:

The purpose of the VRF is to merge SASB and IIRC into a credible international organization that maintains the integrated reporting framework, advocates integrated thinking and sets sustainability disclosure standards for enterprise value creation or focused on enterprise value creation. We see it as a major advancement towards building a more comprehensive and coherent corporate reporting system.

Katie Schmitz Eulitt:

Our entities are complementary in many ways, including; complementarity of our philosophies, complementarity of our products, our networks. Just being able to support one another and then coming together aiming to support the IFRS trustees in their work moving forward. As they've announced their intention to create a Sustainability Standards Board.

Whitney McWade:

Yeah. Which was great news that we heard recently. Their focus initially will also be on this idea of enterprise value. And we'll get into that in a second. But before we move on to the IFRS piece of the puzzle, can you help us understand how SASB and the new Value Reporting Foundation will interact with the other reporting frameworks and standards that maybe take a different view of materiality? SASB he has also publicly announced that it will work collaboratively with the GRI for example. How does that partnership fit in?

Katie Schmitz Eulitt:

That's exactly right. We intend for our collaboration with GRI to be ongoing. As you noted, last year we announced an intention to collaborate. That was followed by a launch of a survey of companies that are using both GRI and SASB in their reporting. That survey was completed in October of last year and we're in the midst of pulling together a technical illustrative report. On the results of the survey that's scheduled to be published in the first quarter of 2021.

Katie Schmitz Eulitt:

We are really committed towards working towards that interoperability that I mentioned previously, between GRI and SASB standards. That work will be ongoing to evaluate the development of a common taxonomy, common metrics and a more collaborative approach to standard setting moving forward.

Whitney McWade:

That's great to hear. At about the same time that that statement of intent from the five organizations was published, the IFRS released a consultation paper on the need for global sustainability standards. And sought stakeholder input on a possible role that the IFRS Foundation could play in the development of such as standards, through the creation of a Sustainability Standards Board.

Whitney McWade:

As we've alluded to already, they have recently announced that project will be moving forward. They will initially focus on enterprise value from an investor perspective and an initial priority focus on climate related financial disclosures. But expanding to include other ESG topics over time. How does that project fit in with both the statement of intent from the five organizations and the creation of the Value Reporting Foundation? There's lots of players getting involved, so how will that all play out, do you think?

Katie Schmitz Eulitt:

Absolutely, it's really exciting times. To be clear, the Value Reporting Foundation really aims to support the IFRS trustees. As they've intended to move forward, following their consultation, we're ready to engage with them. IOSCO, EFRAG and others that are working towards global alignment on a corporate reporting system. The work of the Group of Five really was maybe a warm up. You can think of as getting ready for this big event or big movement, if you will. Now that the IFRS trustees are weighing in.

Katie Schmitz Eulitt:

Now that EFRAG has published its report indicating their intention for setting standards moving forward. We're really trying to demonstrate how fundamental building blocks of that future system exist, how they fit together. How IFRS trustees and EFRAG can take them in and begin building upon them, as their work continues to build out this comprehensive system of corporate reporting.

Whitney McWade:

Yeah. There was another thing that the recent announcement highlighted, is the [inaudible 00:40:52] for the IFRS [inaudible 00:40:54] take a building block approach with all of the standards that exist. You mentioned also a WEF initiative, so the World Economic Forum published a paper on common metrics for sustainability reporting. How does that fit in with all of this, just to add one more piece of the puzzle?

Katie Schmitz Eulitt:

Yeah. The WEF metrics were curated basically, from existing standards that exist primarily from GRI standards, a few SASB standards. They're really focused on demonstrating progress towards achieving the Sustainable Development Goals. It's really fantastic to see WEF and CEOs global input leaning in on these topics. But they're not new per se, they're really curated, they haven't developed new metrics.

Katie Schmitz Eulitt:

It's really important to, one, understand that they're really aimed at demonstrating progress towards impact. And that you can think of them as a subset of the building blocks that are delineated in the Group of Five statement of intent. But we're delighted to see the interest amongst global CEOs and the topic.

Whitney McWade:

Yeah, for sure. Interest from tons of stakeholders has just increased quite dramatically over the last year especially. A lot of these initiatives are still fairly early days. I'm sure that sustainability practitioners and users of sustainability information are keen to see what this will all look like in practice. Do you think that we should expect to see any new frameworks or standards coming out of all of these work streams? Will one, do you think, come out on top? And how will that affect how companies report or how other stakeholders consume sustainability information?

Katie Schmitz Eulitt:

Right. We've certainly seen signaling and action being taken across a variety of regulatory jurisdictions and regimes around the world. With varying levels of ambition, it's quite clear that we're moving towards a world in which disclosure sustainability issues will be more standardized and in some jurisdictions, mandated. We've been working really hard, over the past few years, as evidenced by the statement of intent and other work that we've done. To help harmonize and rationalize standards and frameworks or sustainability related disclosure.

Katie Schmitz Eulitt:

Really, in response to practitioners who are saying, "We can't handle another thing. Can we please coalesce around something." We're seeing investor coalescence around high levels of interest in SASB plus TCFD, as being a fundamental building block that they would like to see at the foundation of all of this. Then depending on the ambition of the jurisdiction, for example, this is one of the reasons we talk about a building block approach to mandated disclosure.

Katie Schmitz Eulitt:

It would enable companies to report, drawing from a common set of sustainability disclosure topics and related disclosure requirements at a foundational level. Think about the middle box in the dynamic materiality graphic that we talked about earlier. Again, rooted in financial materiality and enterprise value creation, that upon which more expansive disclosure can be built. But again, drawing on a common language, right. To address the needs of a broader array of stakeholders. To your point, the interest amongst other stakeholders in these topics is growing and I don't anticipate that it will die down anytime soon.

Katie Schmitz Eulitt:

But a building block approach would also allow jurisdictions to layer in jurisdictions specific requirements as necessary. We're seeing interest in doing that as well. Such a system would help global investors who have global portfolios, have access to foundational level of comparable, consistent, reliable data. While also addressing the changing wants and needs of other stakeholders. We're really working hard towards interoperability, as I mentioned, between those building blocks and towards achieving connectivity of data. So it's structured around agreed taxonomies and available digitally.

Katie Schmitz Eulitt:

We're hoping that there isn't a development of further splinter frameworks and initiatives. The move by IFRS, supported by IOSCO and the movement in the European Union through EFRAG. I think those are going to be the real drumbeats that we need to be following and paying attention to.

Whitney McWade:

You mentioned a few concepts here Katie, one is around need for harmonization or coalescence, as well as jurisdiction specific requirements. There's also sector specific requirements or sector specific considerations to take into account. The SASB standards have very much taken that approach, a very sector specific approach. How do you see the need for harmonization and the need for standard or sector specific information working together?

Katie Schmitz Eulitt:

SASB's work is predicated on the evidence demonstrating that not all sustainability issues play out in a one size fits all manner across companies and industries. We have 77 industry specific standards that really dial down or dial in on those issues that are likely to affect enterprise value at the industry level. There are some jurisdictions that want industry agnostic disclosure requirements across companies in every sector and there's definitely room for that. But our approach is very much focused on financial materiality and industry specificity. Those two things are not mutually exclusive, they can definitely coexist.

Whitney McWade:

Let's shift focus a little to climate change. Obviously, a huge topic of focus across the corporate world. Especially this year as we're heading into COP26 in November and so a lot of demand for climate related disclosures. The big five frameworks that we've been discussing throughout this conversation, also published a case study or prototype to demonstrate what a sustainability related financial disclosure standard could look like. Showing how components of all the frameworks and standards that we've mentioned, as well as the TCFD.

Whitney McWade:

Which has really emerged as a leading framework and risk management framework for thinking about climate related issues. How those could all work together. The IFRS has also indicated that climate's going to be their initial focus. So, can you walk us through the conclusions of the work that led to that prototype climate standard and how you expect that will be used going forward?

Katie Schmitz Eulitt:

Right. Well, to your point, when the IFRS consultation came out. One of the questions in that consultation was, if we are to go about setting up a Sustainability Standards Board, would you support a climate first approach to standard setting or not? We haven't analyzed all of the responses. But clearly IFRS came down, after having reviewed the responses to their consultation, saying that there was strong support for a climate first approach. And so they are going to take that.

Katie Schmitz Eulitt:

But anticipating, we were really striving to demonstrate to the IFRS trustees that a climate first approach could be taken. And very rapidly, that they could move on to setting standards for a broader array of ESG issues. Which is what we hear investors are really supportive of. By showing what, again, existing standards and frameworks could do to be pulled together for a climate focused set of standards.

Katie Schmitz Eulitt:

One of the things that distinguishes the paper that we published in December, the prototype climate standard that you refer to, from the statement of intent. Was that we really drew upon the TCFD recommendations in that prototype climate standard. To show how the recommendations could put together a standard for meeting those recommendations by drawing from SASB, CDSB and other members of that Group of Five.

Whitney McWade:

Right. So, bringing the theory behind the statement of intent into a more real world example. Yeah. Katie, thanks so much for sharing your insights with us today. Is there anything that you'd like to add before we wrap up? Or where can organizations who are looking to learn more about all of these initiatives go to get more information?

Katie Schmitz Eulitt:

Great. Well, our work is really based on transparent, evidence based, market informed, due process that's pretty rigorous. That's an ongoing process. That the standards are codified, but we never say they're finished. In fact, we have over 10 open research projects that are exploring a variety of different topics. We really welcome market feedback on those projects and suggestions for new ones. We've recently updated our website so people can more easily find the open research projects on our site.

Katie Schmitz Eulitt:

They can learn where we are in that project, they can communicate directly with the analyst who is leading the project and so on. That can be found under the active projects subsection of the standard section of our website, which is www.sasb.org. If anyone has further questions, can't find something on our website that you're looking for, they can always email me. My email's really easy to remember, it's Katie@sasb.org, K-A-T-I-E. We're just really grateful to have this time with you. Thank you so much Whitney. We're looking forward to seeing how the landscape continues to evolve.

Whitney McWade:

Yeah, as are we. Thanks, Katie.

Katie Schmitz Eulitt:

Thanks so much.

Whitney McWade:

Voluntary sustainability reporting initiatives have existed for years and are increasingly being adopted by issuers looking to communicate their non financial performance and value creation efforts to stakeholders. Sustainability reporting is in a state of transition. A strong foundation has been established by the initiatives we discussed today; GRI, SASB, IIRC and others.

Whitney McWade:

As the IFRS's Sustainability Standards Board project advances, supported by the work done to date. We expect increased attention to be placed on these important disclosures and for them to become more sophisticated, comparable and decision useful. The landscape is complex and we thank our guests today for helping us to make some sense of it.

Michael Torrance:

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode and to see our other podcasts, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on Apple Podcasts or your favorite podcast provider. We'll greatly appreciate a rating and review, and any feedback that you might have. Our show and resources are produced with support from Vimos marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.

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