The power of capital markets can be harnessed to drive green transformation
The writer is chair of the International Sustainability Standards Board
Government action is essential if we are to tackle climate change. However, no single jurisdiction can succeed by imposing rules only on local market participants. There has to be a global approach, but multilateral policy-making is currently in decline.
To meet challenges of this magnitude, countries must harness what Gelsomena Vigliotti, vice-president of the European Investment Bank, called the “power and ingenuity” of markets.
Markets are the self-generating sources of financing that shape business models and transform economies. If harnessed properly, it can offer solutions at scale.
Ahead of the COP27 climate talks in Egypt in November, there is debate over a $100 billion financing commitment made by developed countries to support poor countries in transitioning to low-carbon economies.
However, Pascal Lamy, former Director-General of the World Trade Organization, argued that the creation of the International Sustainability Standards Board (ISSB) is a “real breakthrough”. Capital markets can move billions of dollars if they are properly directed and informed.
But they can only play this pivotal role if they operate with comparable, high-quality sustainability information that can be relied upon in making investment decisions.
The ISSB, with the support of the leaders of the Group of Twenty and other international institutions, is responsible for providing such language and developing standards that establish a comprehensive global baseline for sustainable disclosures to the capital markets.
The ISSB has also created forums to present multilateral solutions – such as the Judicial Working Group that brings together China, the European Union, Japan, the United Kingdom and the United States of America – and specific bilateral dialogue, including with the European Union. The need for international harmonization is clear.
A recent EU directive states that the bloc’s standards should “contribute to a process of convergence of sustainability reporting standards at the global level” and incorporate the ISSB’s global baseline if it is consistent with EU objectives.
The goals of the European Green Deal will not be achieved without activating global capital markets, and this requires interoperability between the two approaches.
On the contrary, there is much that the European Union can contribute to the work of the ISSB.
Currently, there is a debate in the market about different approaches to “physical” – in other words, what to disclose.
This concept, as used in accounting requirements and language used in capital markets, should not be ignored. The standards proposed by ISSB require the company to clearly disclose information that provides a solid basis for investors to consider sustainability issues when making their investment and voting decisions.
This information will align with the applicable definition of materiality in accounting standards, ensuring completeness and clarity. The definition requires companies to disclose all information that, if missing, erroneous or ambiguous, could reasonably be expected to influence an investment decision. Its application requires judgment and regular analysis.
What counts as a subject in the field of sustainability is constantly evolving. The term “dynamic materialism” is a recognition that capital markets, policy makers, and scientific researchers are making rapid progress in their assessment of the importance of sustainability.
In the standard accounting model, for example, we do not fully incorporate the fact that enterprise value, a measure of a company’s total value, is a function of the demand and supply of capital, and is not separate from investors’ choices. The multidimensional nature of sustainability may shed a different light on the nature of those choices.
This development is a necessary part of our business because what matters to investors is dynamic and changing. The consultation period on the first two proposed ISSB sustainability disclosure standards has just ended.
The rich feedback we have already received will allow us to create a set of standards that can enable capital markets to be a true ally in global efforts to achieve a just climate transition.