Beyond the Alphabet Soup: Accountability in the Sustainability Movement
By Connor Kasch
Efforts to mobilize public finance for climate change mitigation and adaptation efforts through the UN Framework Convention on Climate Change (UNFCCC)’s Conference of Parties (COP) format have proven disappointing so far. While experts believe $3 to 5 trillion is needed annually to address and adapt to climate change, signatory parties to the Paris Agreement have yet to even meet the finance goal of $100 billion in a year to assist developing nations. Given political gridlock and widespread fossil fuel lobbying, I am skeptical of governments’ ability to act alone on this issue. This is of considerable concern, because without proper financing for the high upfront capital costs of renewable energy projects, grid upgrades, and infrastructure resiliency improvements, we risk acting too slowly and watching the worst climate change scenarios unfold in the coming decades.
Encouraging, however, is the pace of movement in the international finance sphere for firms to fund and implement climate-related projects, whether it be because of concerns about future profitability or at the behest of activist shareholders. At COP26, we saw this growing momentum most obviously through Mark Carney’s announcement regarding the Glasgow Financial Alliance for Net Zero. Members of the alliance, which includes over 450 financial firms across 45 countries with over $130 trillion in assets, are committed to supporting their clients (companies, cities, countries etc.) in meeting ambitious emissions reduction targets.
This prompts the question: how can we monitor companies’ decarbonization efforts to hold them responsible for meeting their sustainability goals and ensure they are using their assets most efficiently? The answer may lie in the parallel announcement made on COP26’s “finance day” that received much less press attention: the creation of an International Sustainability Standards Board (ISSB), which represents an attempt to bring a proper disclosure structure to these efforts. While I doubt these standards will do much to empower consumers to hold corporations accountable for greenwashing marketing campaigns, the ISSB does push companies to publish comprehensive and standardized information regarding their progress on key sustainability issues that public and private shareholders can use to evaluate investments. Hopefully, clear communication guidelines for reporting these metrics will mean businesses and investors can no longer claim ignorance as a reason for inaction.
In many respects, the ISSB resembles its predecessor and counterpart, the International Accounting Standards Boards (IASB), which sets the requirements internationally for what financial information (income and balance sheets, cash flow statements, etc.) firms must report publicly. The intention is that the ISSB will establish a similarly ubiquitous system for sustainability disclosures. Together, the ISAB and ISSB are expected to impel corporations to engage in transparent and accessible financial reporting to promote stability in the global market. It remains to be seen how widely ISSB standards will be adopted (the U.S. Securities and Exchange Commission has received push-back from conservative state politicians for providing any sort of guidance on climate change related matters). Still, the ISSB could confer much needed legitimacy in the sustainability space by being an independent standard setter as well as a simplified platform for which companies, excited to advance decarbonization efforts, can springboard into a proper environmental, social, and governance (ESG) reporting framework that is comprehensive and inclusive of both climate change and socially responsible business practices.
The ISSB is not the first organization to set disclosure standards for climate finance, but it signifies a much-needed attempt to harmonize regional sustainability standards and ensure corporations are accountable to their promises. In the early days of ESG, a so-called “alphabet soup” of different boards and standards sprung up to track environmental sustainability progress. The coming consolidation of respected climate scorecard organizations, such as the Climate Disclosures Standards Board (CDSB) and the Value Reporting Foundation (VRF) into the ISSB in 2022, demonstrates the growing maturity of the field.
Nevertheless, I am skeptical of the ISSB’s ability to be effective in countering greenwashing because of its lack of enforceability measures. With the mounting concern over ESG issues in the financial world, the pressure to appear more sustainable and environmentally friendly has grown. “Greenwashing” has emerged as a quick fix to such pressures. Without verified compliance standards, many corporations that recently announced carbon neutrality goals face few accountability measures to ensure they meet those goals. The problem persists as these firms are unaware of what data they need to collect and how best to share it. The ISSB system, which strives to offer a simplified and coherent approach, could advance international cooperation on decarbonization efforts by making the disclosure process clear and easy. However, there is no enforcement mechanism: while governments could choose to follow the model of the ISAB and make the standards mandatory, at the moment ISSB reporting is fully voluntary for companies. Since it lacks teeth, greenwashing companies can sidestep the system. It is up to the investors to determine whether to deliver any consequences or not.
Additionally, there remains the question of who controls these standards. ISSB headquarters are in Frankfurt, Germany, and there are plans to put offices in Montreal, San Francisco, Beijing and Tokyo. Notably, Global South representation sorely lacks. If the ISSB is all about setting priorities and definitions, I’d suspect that wealthier firms from the Global North will be in control of what is viewed as “clean” energy or de-carbonization. Regulatory bodies, while necessary for stability and building trust in the global economy, also imbue a power to those who run them, and the ISSB is more concerned with serving its capitalist financiers than the general public, contributing to fears that the demands of those with money continue to be prioritized over the rest of us. Endorsed as a way to increase financing for climate change mitigation projects in the developing world, the ISSB will be ill-suited for its role if it does not incorporate perspectives on sustainability outside of the Western business narrative.
The decarbonization movement overall has the potential to be incredibly transformational if done right, despite current cringe-worthy corporatization attempts. While the ISSB is not a transformational institution, it is a very necessary set of standards designed to be palatable to companies and investors that are motivated to address climate change. It addresses the need for consolidation and standardization in the ESG impact investing space. Businesses and financial services can act with incredible speed and agility, which we sorely need if we hope to meet the goals set out by the Paris Agreement. The ISSB remains a sign of hope that someone at least can monitor whether the business world delivers on its commitments.
Connor Kasch studies energy policy and development economics as a graduate student at the Fletcher School of Law and Diplomacy. Originally from outside of Chicago, she most recently worked in Myanmar as a Peace Corps volunteer, and is interested in building efforts to address climate change through international cooperation and collaboration.
Photo is by United Nations and is is licensed under CC BY-NC 2.0
