Last week, the SEC released a statement by Division of Corporation Finance Acting Director John Coates on ESG disclosure. In this post, we provide our observations on what his statement may indicate about the direction of globally coordinated efforts on ESG disclosure.
Acting Director Coates is interested in developing global ESG disclosure standards, stating that the SEC “should help lead the creation of an effective ESG disclosure system.” He elaborated that “arguments in favor of a single global ESG reporting framework are persuasive” given what he sees as the global nature of ESG issues. In particular, Coates showed support for the work of the International Financial Reporting Standards Foundation, or IFRS, to establish a sustainability standards board, which he said “appears promising.”
The IFRS is an international non-profit organization that has been steadily working on creating global sustainability reporting standards. By the end of September 2021, IFRS plans to release its definitive proposal, complete with a roadmap and timeline, on whether it will create a sustainable standards board to sit beside the International Accounting Standards Board, IFRS’s accounting standard-setting body.
In February 2021, the International Organization of Securities Commissions, or IOSCO, issued a public statement in support of IFRS’s work. IOSCO’s members include 34 international securities regulators, including the SEC and the CFTC, and the securities regulators of Brazil, China, France, Hong Kong, Spain and the UK, among others. In its statement, IOSCO said that it “sees an urgent need for globally consistent, comparable, and reliable sustainability disclosure standards and announces its priorities and vision for a Sustainability Standards Board under the IFRS Foundation.”
We expect that one of the key challenges in developing a global disclosure framework will be for stakeholders to agree upon the definition of “materiality” in the context of ESG risks and opportunities.
Betty M. Huber is counsel and co-head of the ESG and Environmental Transactional Groups at Davis Polk & Wardwell LLP.
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