Sustainability standards and the role of corporate boards

With enhanced scrutiny, boards need to be more strategic with incorporating environmental, social, and governance issues into their operations. (Getty/ recep_bg)

Growing awareness of environmental, social and governance (ESG) issues including climate change and net-zero goals has spurred businesses to report on sustainability impacts. This has left organizations facing a complex array of frameworks and unclear disclosures.

The International Sustainability Standards Board (ISSB) was established by the International Financial Reporting Standards (IFRS) Foundation Trustees in response to investors’ demand for global ESG disclosures by introducing comprehensive sustainability standards to enable more consistent reporting. The inaugural standards, IFRS S1 and IFRS S2, were issued on June 26, 2023, with more expected to come.

CPA Canada spoke to Rosemary McGuire, CPA, vice-president, research, guidance and support and Barbara Stymiest, FCPA, corporate director who recently participated in an ICD/CPA Canada webinar: The Future of Sustainability Reporting with ISSB Standards to get their thoughts on what this means for boards moving forward.

CPA CANADA: How significant are the ISSB standards for organizations?

Rosemary McGuire (RM): The expectations of businesses are shifting with respect to management and transparency of sustainability issues and the regulatory landscape is evolving quickly.

The ISSB’s objective is to bring clarity and consistency to the market by setting a global baseline for sustainability reporting. Currently, IFRS Sustainability Disclosure Standards – including IFRS S1 and S2 – are not mandatory in Canada. However, it is only a matter of time before requirements are introduced.

It is also important to remember that securities legislation in Canada already requires disclosure of material climate change-related information in an issuer’s regulatory filings. Many private companies are also providing some form of sustainability reporting in response to enhanced stakeholder demand.

Barbara Stymiest (BS): The ISSB standards are exactly what we need to start the reporting process. And there is an opportunity for Canada to lead in the area of sustainability standards. Canada has always been a strong contributor to global standard setting and the Canadian Sustainability Standards Board (CSSB) is well positioned to continue to lead.

CPA CANADA: How will the ISSB standards affect boards moving forward?

BS: We are well beyond the days in thinking if we just deliver profits, everything takes care of itself. That simply doesn’t hold true anymore. Boards need to be more holistic in understanding that environmental, social and governance are not separate activities but are an integral part of driving successful outcomes for all relevant stakeholders.

Historically audit committees focussed solely on oversight of financial reporting and assurance. Moving forward, they will also need to oversee the measurement of sustainability, taking into account both environmental and social outcomes. The oversight of these outcomes for stakeholders should be subject to the same processes as financial reporting standards, which is why ISSB—and CSSB for that matter—will eventually require third party assurance over the outcomes that are reported.

RM: Boards are responsible for ensuring ESG matters are considered in the organization’s strategy and for exercising effective governance of ESG matters.

It is important to not lose sight of the connection between the “E,” “S,” and “G,” and avoid treating them in silos. Investors want to know if relevant sustainability issues are receiving board attention and this is a foundational aspect of the ISSB standards. For example, disclosures about board oversight of sustainability and climate risks and opportunities are required under both IFRS S1 and S2.

CPA CANADA: How well-prepared are organizations?

RM: There is currently a significant trust deficit with respect to sustainability reporting. In an EY investor survey, 76 per cent of investors say companies are highly selective in what information they provide to investors, raising concerns about greenwashing. A recent PwC study shows that just over half of directors say their boards are sufficiently prepared to oversee forthcoming mandatory ESG disclosures, up from 25 per cent in 2022.

Standards can help directors bridge some of these gaps by giving them a framework to enable them to identify material ESG issues, relevant KPIs, and measure and monitor performance.

CPA CANADA: What do boards need to do to prepare?

BS: Choosing the issues that are relevant to your organization and your stakeholders is key. As such, a board must first stand back and ensure there is a strategy to link the purpose of the corporation, to what they do for customers and employees, and other stakeholders. The structure of oversight will flow from there.

At George Weston for example, the board was very aligned with the choice of Loblaw to focus on the issues of eliminating food waste and plastics and also on employee health and well-being. For the organization’s real estate arm the focus was determined to be its carbon footprint.

Bear in mind that the quality of measurement should be comparable to the measurement of financial outcomes, so good data practices and internal controls are essential. However, there is a big gap between what audit committees do today and what they will need to oversee moving forward.

CPA CANADA: How do organizations build that capacity?

BS: Organizations have CFOS and audit committees that traditionally measure and oversee shareholder outcomes. We don’t yet have the equivalent capacity in place for reporting environmental impacts and social factors. Building the same quality of capturing, managing, measuring, and reporting information that will meet the expectations of all stakeholders will take manpower, consistency of standards, and internal controls that will be comparable to what they have had for decades on the financial side.

Organizations will need to identify a change agent within their firms that will get them from where they are today, to where they need to be in measuring stakeholder outcomes. Who will determine the relevant issues and identify the relevant data? What other departments need to be involved in order to get all the kind of measurement you need to achieve the outcomes that matter. How will third party assurance evolve?

CPA CANADA: What can we expect to see in the coming months?

RM: There is a vast amount of work to do to standardize and enhance sustainability reporting globally but that shouldn’t stop organizations from laying the groundwork now. While the focus is on implementing IFRS S1 and S2, boards should not lose sight of other areas that are garnering increased attention, namely biodiversity, human capital, and human rights which will likely be part of the ISSB’s future workplan.

BS: Fortunately, Canada already has a structure in place that will make it easier for organizations to implement ISSB standards and has contributed hugely to their development. We also have the distinction of being selected to have one of the IFRS Foundation’s key global centres in Montreal.

ESG is figuring into board agendas and needs to be embedded into a board’s strategy. The issue now is building capacity to manage the enhanced scrutiny required. Boards will have to be firing on all pistons to get to great outcomes.

Additional Materials

For an overview of actions boards can take, visit ESG Framework for Boards or CPA Canada’s article International Sustainability Standards Board (ISSB): Resources and guidance. And go here to view the ICD/CPA Canada webinar: The Future of Sustainability Reporting with ISSB Standards.