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Beware unrealistic expectations of ESG reporting: IASB chair

Environmental, social and governance (ESG) reporting is not a panacea for all social or environmental challenges, the chairman of the International Accounting Standards Board (IASB) has suggested.

Speaking at a conference in Brussels yesterday, Hans Hoogervorst acknowledged a need for more standardisation and harmonisation of ESG reporting requirements and said there were things the IASB could do to bring improvements in that field.

However, the organisation, which develops the International Financial Reporting Standards (IFRS), was not best placed to take the lead on creating “more clarity in the somewhat chaotic world of wider corporate reporting”, he said.

Instead, public authorities should take the main responsibility for this given that so much of ESG reporting was intertwined with public policy goals. 

At the same time, one should beware “unrealistic expectations of ESG reporting”, said Hoogervorst.

“ESG reporting is good, but direct public policy action is often better and more effective,” he said.

As an example, he cited the political decision to force supermarkets to charge for plastic bags. This had led to an 85% reduction in the use of plastic bags, whereas sustainability reporting by a grocery chain, despite its genuine commitment to it, had failed to keep its plastic bags from burdening the environment for many years, he said.

And while it was positive that the G20 had asked the Financial Stability Board (FSB) to address climate-related disclosures, Hoogervorst argued that “we need more drastic action from our politicians to prevent the catastrophic consequences of climate change”.

It was crucial that pricing, for example by means of a tax, fully reflected the external environmental effects of economic activities, he continued, as this would encourage development and use of environmentally sustainable alternatives.

Ultimately, in such a scenario financial reporting would become sustainability reporting, he said.

Hoogervorst’s intervention comes at a time when investors have been urged to take action to help mitigate climate change. Investors have called for relevant action from businesses and policy makers. 

Today, 10 companies announced they had committed to implementing the recommendations of the FSB’s Task Force on Climate-related Financial Disclosures (TCFD) within three years. It has been reported that they were the first companies to do so, although many more have expressed backing for the TCFD’s recommendations.

The task force’s reporting framework is voluntary, although there have been calls for it to be made mandatory. The UK government yesterday said it had officially endorsed the TCFD recommendations and encouraged all listed companies to implement them.

With respect to asset pricing properly capturing environmental impacts, EU policymakers are said to have recently made progress on the bloc’s carbon market. A week ago, representatives from the European Parliament, the Council and the European Commission reached a conditional agreement on doubling the rate at which surplus emissions allowances will be removed from the Emissions Trading System (ETS) and placed in a reserve during the first five years of operation.

The move was hailed as a breakthrough by some. The International Investors Group on Climate Change said investors welcomed the progress made in the negotiations to limit the ETS surplus and boost the carbon price. “This ambition must be maintained,” it said.

The European Commission has embarked on a project to develop a EU strategy on sustainable finance, and the High Level Expert Group advising it has included strengthening ESG reporting requirements among its eight early recommendations to the Commission. The group has called for asset pricing to be strengthened by improving ”the assessment and management of long-term material risks and intangible factors of value creation”. 

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