The power of capital markets can be harnessed to drive the green transition

The author is Chairman of the International Sustainability Standards Board

Government action is essential if we are to fight climate change. However, no jurisdiction can succeed by only imposing rules on its local market participants. There must be a comprehensive approach, but multilateral policymaking is currently at an all-time low.

To meet challenges of this magnitude, nations must harness what Gelsomina Vigliotti, vice-president of the European Investment Bank, has called “the power and ingenuity” of markets.

Markets are the self-generated sources of finance that shape business models and transform economies. Properly harnessed, they can provide large-scale solutions.

Ahead of November’s COP27 climate talks in Egypt, there is debate over the $100 billion funding pledge made by developed countries to help poorer countries transition to low-income economies. carbon emissions.

However, Pascal Lamy, former director general of the World Trade Organization, said that the creation of the International Sustainability Standards Board (ISSB) is “a real step forward”. Capital markets can move trillions if properly guided and informed.

But they can only play this pivotal role if they operate with comparable, high-quality sustainability information that can be trusted to make investment decisions.

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The ISSB, supported by the leaders of the G20 and other international institutions, is tasked with providing such language and developing standards that establish a comprehensive global baseline of sustainability information for capital markets.

The ISSB has also created forums to propose multilateral solutions – such as a jurisdictional working group that brings together China, the EU, Japan, the UK and the US – and specific bilateral dialogue, including with the EU. The need for international alignment is clear.

A recent EU directive states that the bloc’s standards should “contribute to the process of convergence of sustainability reporting standards globally” and incorporate the ISSB global benchmark if consistent with the objectives of the EU.

The objectives of the European Green Deal will not be achieved without making global capital markets work, which requires interoperability between the two approaches.

Conversely, the EU can make an important contribution to the work of the ISSB.

Currently, there is a debate in the market around different approaches to “materiality” – in other words, what should be disclosed.

This concept, as used in accounting requirements and in the language used in capital markets, should not be ignored. The standards proposed by the ISSB require a company to clearly disclose information that provides a solid basis for investors to consider sustainability issues in their investment and voting decisions.

This information will align with the established definition of materiality in accounting standards, thereby ensuring completeness and clarity. The definition requires companies to disclose all information that, if missing, erroneous or obscured, could reasonably have influenced an investment decision. Its application requires judgment and regular analysis.

What is considered material in the field of sustainability is constantly evolving. The term “dynamic materiality” is an acknowledgment that capital markets, policymakers and scientific researchers are rapidly advancing in their assessment of the importance of sustainability.

In the standard accounting model, for example, we do not fully integrate the fact that enterprise value, the measure of the total value of a business, is a function of the demand and supply of capital, not disconnected from investors’ choices. The multi-dimensional nature of sustainability might shed different light on the nature of these choices.

This evolution is a necessary part of our work because what matters to investors is dynamic and changing. The consultation period on the first two sustainability reporting standards proposed by the ISSB has just ended.

The rich feedback we have already received will allow us to create a set of standards that will enable capital markets to be a true ally in global efforts to ensure a just climate transition.