ABA Letter to IFRS re: Consultation on Sustainability

IFRS Foundation
Columbus Building, 7 Westferry Circus
Canary Wharf
London
E14 4HD
UK

To the Trustees:

The American Bankers Association (ABA) appreciates the opportunity to comment on the Consultation Paper on Sustainability Reporting (the Paper). The Paper seeks comment on the role the IFRS Foundation (the Foundation) should play in worldwide efforts to address the need for generally accepted standards related to sustainability reporting. The demand for sustainability information by investors and other stakeholders related to environmental, social, and governance risks and activities has grown dramatically both worldwide and in the U.S. and there is general agreement among many that comparable and consistent disclosure standards are needed. ABA members consist of lenders, investment bankers, asset managers, investment analysts and custodians and, consequently, bring perspectives from both the users of the information as well as the preparers.

Overall, ABA agrees that there is a substantial need for sustainability reporting standards that focus on relevant, comparable, consistent, and decision-useful information and ABA supports the efforts of the Foundation to explore this important issue. As overseer of the International Accounting Standards Board (IASB), the Foundation possesses a strong culture of relationship-building among stakeholders, of due process, and of transparency. These are critical aspects that a standard-setter must possess. ABA also believes that practical experience that the IFRS Foundation possesses related to assessing stakeholder needs, internal control requirements, and cost-benefit relationships will be critical moving forward. Nonetheless, a decision by the Foundation to form a Sustainability Standards Board (SSB) is complicated by the complexity of climate risk metrics, an active and fast-changing field of standard-setters, and the funding structure of the IFRS Foundation. Therefore, we have the following comments for your
consideration:

Climate Reporting Challenges May Take Years to Address

The Paper notes that an initial focus of a Sustainability Standards Board (SSB) would be on climate-related risks. ABA agrees that climate risk reporting should be a priority. However, addressing climate risk reporting will be a challenge that could potentially impair the IFRS Foundation’s reputation as a global setter of high quality reporting standards. The environment related to metrics that are relevant to climate change is virtually embryonic worldwide. The current lack of standardization of reporting metrics that the Foundation seeks to address is likely the result of relatively new and quickly-evolving understandings of science, ones that have yet to be “monetized” into a common economy. Such an economy must have reporting standards. More importantly, however, it must have wide and generally-accepted infrastructural mechanisms to incentivize or enforce the accuracy of the reported metrics.

These mechanisms do not yet exist on a wide basis and may take many years to develop. Until such mechanisms are generally accepted and in place, which could conceivably include taxation regimes and auditing requirements, compliance with the standards may be limited. It will be difficult to argue that such standards are of high quality if compliance rates are low. In this scenario, the impact of any finalized standards could be minimal and this will impede the overall purpose of the objectives presented in the Paper.

The Relationship with Existing Standard-setters should be Clarified

The Paper acknowledges the efforts of various other standard setters and their commitment toward creating a coherent and comprehensive reporting system. The Paper also illustrates how the SSB activities would initially address investors as its primary constituent and how certain other standards would address other stakeholders. We observe that the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and metrics set by the Sustainability Accounting Standards Board (SASB) appear to collectively be preferred from an ESG investor’s perspective in the United States. While the TCFD has no standard-setting authority, SASB’s due process and conceptual framework appear to fit comfortably into those likely foreseeable by the Foundation if an SSB is pursued. ABA notes that SASB intends to merge with the International Integrated Reporting Council in 2021 to create the Value Reporting Foundation (VRF). The resulting entity appears to comprehensively address the gap between general purpose financial reporting and value creation reporting for investors, who are proposed by the Paper to be the initial primary constituent of the SSB. As a result, it appears that an SSB would initially “compete” with SASB/VRF.

We do not view this competition negatively. In fact, the current relationship of standards developed by the U.S.-based Financial Accounting Standards Board (FASB) and those by the IASB indicate complementary and appropriately distinct differences in key areas. We believe that financial reporting worldwide may be more decision-useful as a result of the different perspectives reflected. In other words, “competition” between respected standard-setters can be beneficial. While competition can be healthy, however, this does put into question whether a new SSB is needed.

With all this in mind, ABA recommends that the Foundation first formally define how the SSB’s standard-setting activities will be conducted in light of the activities of SASB/VRF’s and other standard-setters. This will also include an analysis of reporting gaps the SSB will address and how the SSB can be best to fill the gaps. A sound decision related to SSB formation can be made only after analyzing such factors.

The Foundation Funding Model is a Major Consideration

The majority of the IFRS Foundation's funding is currently from voluntary contributions from jurisdictions that have put in place national financing regimes, as well as from private organizations. With this in mind, the potentially highly-political usage of sustainability metrics can produce “winners and losers” and, thus, may unintendedly put voluntary contributions at risk. Regardless of any separate fund raising processes, this could effectively reduce funds needed for the IASB. This would be an unacceptable result, as it could undermine the IASB’s ability to fulfill the mission it effectively fulfills.

As the Foundation considers the decision to form an SSB, priority must be given to eliminating – or substantially reducing –the risk that IASB funding levels can be adversely impacted.

In closing, ABA encourages the Foundation to explore the possibility of forming an SSB in detail. While there are challenging issues the Foundation must address prior to making a decision, we believe a sober and transparent assessment will be valuable for all stakeholders, no matter the ultimate decision the Foundation makes.

Thank you for your attention to this matter and for considering our request. Please feel free to contact me ([email protected]; 202-663-4986) if you would like to discuss this further.

Sincerely,

Michael L. Gullette