MONTRÉAL – International automobile manufacturers, including those based in the U.S., have been presented with the first global sustainability reporting standards designed to become compulsory in many countries beginning Jan. 1, 2024.
They may also apply to foreign companies operating in the U.S. and overseas branches of U.S.-owned companies such as Ford and General Motors, depending on an upcoming decision by the Securities & Exchange Commission.
The standards were approved Feb. 16 by the Germany-, Canada- and the U.S.-based International Sustainability Standards Board. The announcement will trigger a series of decisions by national governments and multinational jurisdictions such as the European Union on whether, and if so when, these standards become mandatory or an official option for sustainability reporting.
The ISSB is formally linked to the International Accounting Standards Board, whose financial reporting rules are compulsory for listed companies in 167 jurisdictions. That includes all EU countries, the U.K., Canada, South Africa and Australia, for example, and are an option for foreign companies operating in the U.S., such as Netherlands-headquartered Stellantis.
Such a global reach is the goal of the ISSB, whose reporting standards will measure how companies protect themselves against environmental (especially climate) risk and other sustainability concerns, such as avoiding the use of forced or cheap labor.
For the U.S., the picture – as is often the case with international standards – is complicated by the country’s traditional reliance on domestic laws. This will be the case with sustainability reporting, with the SEC developing its own national standards, expected to be released in April These are likely to cover U.S.-owned, U.S.-based operations, such as those run by Ford and GM.
“The required information about climate-related risks would also include disclosure of a registrant’s greenhouse gas emissions,” a draft of the SEC standards says in part.
But the ISSB standards still will be relevant. One reason is that they are based on a framework developed by the Task Force on Climate-Related Financial Disclosures (see graphic, below), a body backed by the G7 group and central banks, whose sustainability reporting framework “has been widely endorsed by U.S. companies and regulators and standard-setters around the world,” according to the SEC’s draft reporting standard released in 2022 – hence the U.S. and ISSB systems will be similar.
Also, the formal relationship between the SEC rules and the ISSB standard is one of the most important decisions the SEC will make in April. The draft asked for comments on whether any SEC “alternative reporting provision” should be based on “a global sustainability standards body, such as the ISSB.” If so, should that reporting be limited to foreign private companies operating in the U.S., such as Stellantis, or all major companies – potentially including Ford and GM.
“What conditions, if any, should we place on a registrant’s use of alternative reporting provisions based on the ISSB or a similar body?” the SEC asks.
The answer will come in April. But regardless, major automakers with plants outside the U.S. may have to develop ISSB-compliant sustainability reports anyway. The U.K., Singapore, Japan and others already have said they may base their own sustainability standards on ISSB guidance or authorize them as a formal option for reporting for operations in their countries. Like the U.S., the EU is developing its own standards – although these are likely to tell companies operating there to release more sustainability data than that required by the ISSB model (and the SEC). Talks are ongoing as to whether the ISSB standards would be regarded as a core requirement, to which the EU will tack on more reporting demands. The answer here will come by June, which is when the EU will release its own mandatory standards.
In North America, the ISSB and the SEC have been liaising to avoid unhelpful differences between their standards, but the release of both final standards will show whether that work has been fruitful. This potential problem was noted at an ISSB symposium staged in Montreal. There, Grant Vingoe, Ontario Securities Commission CEO, said this potential SEC/ISSB split would impact how Canada – whose auto sector is tightly integrated with the U.S. industry – responds to the ISSB standards via the new Canadian Sustainability Standards Board, operational from April (2023). The CSSB “will look at what the SEC does and at the ISSB – see how it fits together” – to ensure ISSB and SEC rules are “consistent or not inconsistent...to preserve our privileged position with U.S. capital markets,” Vingoe said.
Regardless, ISSB chair Emmanuel Faber (pictured, left) was bullish at the symposium when announcing that the board had approved the final versions of its first two standards: IFRS (International Financial Reporting Standards) S1 General Requirements for Disclosure of Sustainability-Related Financial Information and IFRS S2 Climate-related Disclosures will now be released by the end of Q2 2023.
These two standards lay down in practical detail how automakers and other sectors can report how they are impacted by climate change and the environment and how they are preparing to deal with these issues, which can impact their bottom lines. Their goal is to help global investors better assess the long-term value of listed companies and which ones are prepared for climate change, with sustainability reports issued alongside standard financial statements.
This is a key goal of the standards: helping investors identify companies truly charting a path toward sustainable profits, with reliable information and without misleading “green-washing” marketing.
With climate issues having long-term influences on profitability, analysts who value securities worldwide find sustainability data comparable from country to country helpful: “It’s about transparency to look across the world and view the facts about a security you were trying to evaluate,” says Martin Moloney, secretary general of the International Organization of Securities Commissions.