Jingdong Hua, vice-chair of the International Sustainability Standards Board (ISSB), and Paul Druckman, chairman of the World Benchmarking Alliance, sit down with Workiva’s Mandi McReynolds to share how standards and benchmarks bring credibility to ESG reporting as well as their insights heading into COP28.
Transcript
Mandi McReynolds
Hello and welcome to ESG Talk, your go-to-source for insights and advice from leaders in environment, social, and governance. I’m your host Mandi McReynolds. Today we are joined by two global sustainability leaders. We have Paul Druckman, the chair of the World Benchmarking Alliance and a member of Workiva’s ESG Advisory Council. Paul was also a former member of the Financial Reporting Council and Chair of the UK Accounting Standards. We also have with us Jingdong Hua, the Vice Chair of the International Sustainability Standards Board - more commonly referred to as the ISSB. Paul and Jingdong, welcome to the show.
Paul Druckman
Thank you.
Jingdong Hua
Thank you.
Mandi McReynolds
Well, we are so delighted that you're here. Let's jump right into it. COP28 kicks off in Dubai next week. COP is an annual conference hosted by the United Nations that bring together global leaders to combat climate change. We'll be talking about this year's event later in the show and some of the key themes and conversations and get your hot takes as leaders in the global world looking at finance and sustainability together. Two years ago, the International Sustainability Standards Board, which is known as ISSB, was launched actually at COP26. So, Jingdong, I wonder why was ISSB created and how is this different from other standard bodies like the GRI, I know some work in partnerships and just could you give our audience a little bit more to understanding the background to this launch at COP?
Jingdong Hua
Indeed, Mandy, the ISSB was born out of COP26 because there is a great recognition that investors need better information on sustainability, including on climate change, for them to make informed decisions. And how do you convert the many great initiatives that have happened in the past 20, 30 years each with great intent, but cumulatively creating a confusing landscape of alphabet soup of different standards that is actually making the investment decision making more confusing rather than more efficient. And therefore I think that recognition was getting stronger and stronger at the end of the day. And thought of the possibility for the foundation to play a role. And definitely through a wide consultation, the feedback was very, very positive. And of course we benefit from our sister board, the International Accounting Standard Board, setting a great precedent of converging different national accounting standard over the past many decades. And that obviously give us a great platform to begin that journey to convert the different alphabetic soup of voluntary standards into a global baseline of sustainability disclosure that will connect global financial markets, connect investors with companies who want to attract investment, you know, by speaking the same language. Everybody benefits from making more informed decisions. So one difference, as you mentioned, with other standards, one is that eventually, just like the international accounting standard, we look forward to a global capital market, primarily a listed public market, to use our standards in a mandatory fashion through national regulatory bodies. That's number one. Number two, obviously we serve the needs of investors and other standards, uh, of both voluntary, but also they may serve a broader stakeholder group, multi-stakeholder standard. So we are laser focused on the need to the investor. You know, let me argue that if we could somehow make the 400 trillion global savings, in terms of making better decisions in where they should invest. And they have a better way of analyzing sustainability, risk and opportunity, including the first thematic standard, climate standard, that will be good for everyone.
Mandi McReynolds
And I would echo that our listeners and those tuning in really love the focus of the ISSB, really focused on the risk, opportunities, the cost, and the targeted stakeholder of the investor. I think that idea of consolidated one standard, one opportunity for us to consider is something that many are advocating for and to get really clear on this is for the investor stakeholder. So thank you both for your advocacy over the years and the work. Now recently in June of this year, the ISSB issued its first two standards, the IFRS S1 and the IFRS S2. So real quickly, Jingdong, could you provide a quick overview of both of those standards and include how they were developed so our audience can be thinking about their own practice and alignment and working together towards these global standards?
Jingdong Hua
We certainly didn't start with a vacuum, you know, the work of integrated reporting. CDSB and SASB form a solid foundation and by now obviously TCFD work fully reflected in our standard. So just coming to the two specific standards and these were done as I said based on some good legacy voluntary standard number one. Number two based on a broad feedback and we have received 1400 substantive feedback from many different stakeholder investors, preparers, public policy, NGO, civil society, and we 14 board members deliberated carefully and rigorously before we finalized our standards. So standard number one is what we call the general requirement for sustainability disclosure. Let me continue to use the analogy of a new common global language. Right. So if we view our standards as a common language, that S1 is a grammar of the language, the vocabulary, the lexicon, the structure of language. You know, we require investors or we require companies to disclose according to a certain architecture, which is TCFD. We ask them, you know, to do a materiality test based on the same definition in accounting standard. We asked them to report at the same time on sustainability as their accounting disclosure. So they form the annual general financial disclosure. And we also say that while in the future, ISSB will develop a center of thematic standards. While that is being developed, it's not an excuse for a company not to disclose material information that has not been included like in S2 climate. So you still have to, based on this general approach, disclose all of your material, which I mean material, sustainability, risk, and opportunity. S2 is about climate. This is where we require a company to disclose their GHG emission scope 1, 2, and 3. Recognizing 3 is very strongly demanded by investors. And for many companies, scope 3 throughout value chain far outweighs the emission from their own S1, S2. So important risk and opportunity factors for investors. We ask companies to articulate their transition risk and their physical risk. We require a company to carry out scenario analysis and reveal their resilience plan, resilience assessment. And obviously you need to disclose all material risk and opportunity pertaining to the climate journey against the, you know, if a country has adopted the global commitment to Paris Accord, and of course, that's a benchmark. Or if there is a national target that the company needs to comply to, they also have to disclose that. So in a nutshell, that's what we require S1 and S2, and they will become effective January 1st, 2024. We have given a lot of flexibility and what we call relief to make sure that when you speak a new language nobody can do it with perfection on day one. It's a journey we travel. Therefore, those relief and those flexibility will give companies the initial comfort and encouragement that you should start, right? If you don't have actual data use, emission factor use estimation, we also say that in year one companies just focus on emission scope one and two. We exempt you from disclosing scope three because it takes time. Then next year, your scope three is somebody else's scope one, two on your supply chain, right? We have other flexibility recognizing different companies in different jurisdictions have different stages of readiness at different resource level. But the message I wanted to take advantage of this podcast is to encourage companies to start that journey and don't wait.
Mandi McReynolds
You know, you've got five years to the sustainable development goals of 2030. You’ve got these standards and global regulation colliding and coming together, some of the frameworks using the ISSB. And so what a pivotal year it is. And you can't start, like thinking my own team, we're starting talking about this well in advance to get us on the runway as an organization and as a company. Thinking of that movement with the SDGs and some of the voluntary frameworks, and Paul shifting gears over to you for a moment. I'm just curious, you know, in the previous episode you were here on ESG Talk, we were talking about benchmarking and transparency and where organizations measure in the private sector impact. How do you see the standards rolling out impacting the work of the World Benchmarking Alliance or other voluntary frameworks?
Paul Druckman
The ISSB standards, of course, as Jingdong has made very clear, are laser focused on investors. Now, of course, investors are interested in anything that's going to be a significant risk or opportunity for the organization itself. However, one also has to think about what if it doesn't really impact the organization, but it impacts people and the planet? And therefore the responsibility of the organization beyond not necessarily just where capital value is involved. And what we need to do is to understand very clearly that there's a blur. It's not as though there's a finite fence around what investors are interested in. They're interested in a lot. But there are gaps in that. There's a vacuum as well on the one side. So what we do need to do is to understand how these corporates are actually impacting the sustainable development goals, where we're trying to get to, to stay at 1.5, although that's gone. And I think we all know that. But where these standards, going back to your question, where the ISSB standards are critical, are that we can rely on the data that's disclosed within the focus on investors. And therefore, there's a great amount of the information that's going to be used in benchmarks that are wider, have that credibility, that assurance, those global standards. And I think that's the essence of it. And also the comparability, because certainly what what our benchmarks do and other benchmarks do is they're very much around comparability. But if you think of the classic in an accounting sense is a full-time employee. How many employees are there at Workiva? Well, it depends how you count it. I'm an accountant and we all, it's the overall saying, what would you want the number to be? But there is an argument around that because it depends if you include part-timers and all those sorts of things. Whereas the ISSB and standards do is they actually tell you what to do, you know, and there's less of that so that you can get comparability. But it's a critical step to have this, and it will make, frankly, our job easier.
Mandi McReynolds
That's right. We're all for making the job easier. And I'm curious for this one's for the both of you. Where does this take the importance of standards and benchmarking as it relates specifically to sustainability reporting? And Jingdong, I wonder if you wouldn't mind going first and just sharing your thoughts and then Paul building on that, if there's others things we should consider as we think about sustainability reporting specifically.
Jingdong Hua
Sure, Mandy. And I speak from my past 30 years working in financial market, you know, both as an issuer, as treasurer of the World Bank, you know, the World Bank actually created the first green bond, but also as head of the World Bank Group pension as the investor in the space, right? So at the end of the day, the eventual goal is to make global financial market more transparent, more accountable, more comparable, more trusted, and more efficient and reduce costs for everyone, right? And therefore standards will play that role. I can give you a very specific example. I talked to a chief sustainability officer of a big multinational company, who told me Jingdong the sooner I don't have to report because my company operates in over 100 countries. And I have to, you know, my subsidiaries, you count everybody, I have to do three to 400 different ESG reporting every year. That's a burden to the company. Not to mention the fact it's gonna confuse the investors. Right? So conversion to a single standard or in the case where there are still you know like the European standard on their own, how do we make sure we achieve interoperability so that together we also speak similar languages or different dialect of the same language so that an investor you know has no difficulty when they open a European companies disclosure, which has to comply with the European standard, oh, these parts also speak the same language of ISSB. So I have no difficulty understanding. That's interoperability. So that we all converge into a global landscape that everybody speaks the same language, you know, with a bit of dialect. Now that I'm based in Montreal, I do appreciate the Montreal French is slightly different than the Parisian French, but you can understand each other.
Paul Druckman
Mandy, can I come at this from a very slightly different, because Jingdong has explained it, the reporting side so well. I think it's the impact, it's the impact that it's going to have on businesses that I'm most excited about, yeah? In terms of, you know, what these standards will produce. Because when you report, you know, when you have a mandatory sustainability report, it's going to be the business of the board of directors to approve those sustainability reports. And therefore they're going to have a lot more attention on it. It's not just something that, that is not for their necessarily for their agenda. And, and I lied to that. What that means is it's much more likely that sustainability issues are going to be brought up in the board. And more and more, I find that the board members that I talk to are raising the issues possibly even more than the senior executives, because they are aware of their responsibilities as board members. And I think, I really do believe that this is one of the catalysts for significant change in mindset around strategy, business model, and all of that, and mission of organizations. And to me that's the exciting bit that this can really make a difference.
Mandi McReynolds
Well, I agree. And as we continue down this journey, it's also companies really thinking about the quality of the data that they're releasing. It's a really interesting dialogue. This idea of authenticity, clear-cut action, true transparency and innovation coming together. All key themes coming out of Climate Week in New York, giving us a sneak preview of COP, what we talked about earlier in the show. So I'm curious from the both of you, what did you see coming out of Climate Week and what are you thinking is momentum as we head into COP 28? And I wonder if Paul, you might kick us off here.
Paul Druckman
I think the thing to remember about Climate Week is that it is actually a subset of the General Assembly. It is, they call it UNGA, which is the UN General Assembly. And that was disappointing. There were countries, you know, the UK, France, China, Russia. I mean, China and Russia for different reasons, but there were leaders who weren't there. And that's really disappointing. And, you know, it's almost got to the stage where the UN are having to look at themselves and say, are they fit for purpose. The other side of it is if you go to climate week, which is effectively the capital market side of things and the NGOs, that has an energy that is fantastic. And I think Climate Week, as far as I hear, was full of that, you know, from the march to, you know, the Climate Pledge, they're now 420 of the major corporates around the world. And I think it's, you know, it's come through that corporates are really, really moving the thing forward. Actually, it's not just corporates, it's the capital markets and the NGOs that are around that space, which will lead on to comments about COP28. And it strikes me that what we need from the UN is guiding principles for corporate accountability. Yes, and that would, you know, some high-level group that would really make that happen. And it isn't going to come from the world's governments, it has to come from us and the likes of Workiva and ISSB and others. And I think that's the really important piece. And the other thing that with that corporate accountability, there's a phrase that we use at the World Benchmarking Alliance is that we need everyone everywhere all at once. Yes, we can't subdivide. We have to collaborate and work together. And every little bit that one does is really important.
Mandi McReynolds
So as we think about this piece, it's kind of interesting, the theme and the energy from Climate Week was because we can and we will. And as we look at the organizing themes of COP, there's technology, innovation, inclusion, frontline communities and finance. I would love, Jingdong, you shared in the prep for this session, you were a previous engineer. And so I wanna get in these two themes, actually a little bit more your personal takes from you and Paul. You know, we've got in COP these two really interesting things happening. One is the technology and innovation hub that's dedicated to a stage and two full weeks of programming around technology, innovation and entrepreneurship to tackle climate change. There's the Innovation Forum that's looking at cutting edge tech. There's this idea that I would love to hear from you is what technologies are you personally excited about in this space that you think is innovative and can create some change?
Jingdong Hua
So Mandy, before I get there, let me also say that I was at Climate Week and in addition to getting a lot of steps done because running from one event to the other, the message I wanted to share is that my impression of engaging with the corporate side of things is that the corporates already recognize that they no longer ask whether they would do ISSB standard or not. That's no longer a question. They are asking, how do we report on Scope 3? How do we get our value chain data collected? So I think, I mean, I'm very encouraged because it seems the train has left the station in terms of we embarking on this journey of creating this new lingua franca of sustainability disclosure. So that was a very exciting week for me. So as a former chemical engineer, and this is certainly my personal opinion, I definitely look forward to a breakthrough technology that will suck the CO2 out of the atmosphere because we need disruptive technology to accelerate the disruption of this inevitable trajectory of much higher temperature. But I have one angle I wanted to put as an ISSB board member. That is, I certainly hope innovation and technology would make the job of collecting sustainability data much easier for everyone, including many SMEs. Because eventually, while ISSB standards will start with the big cap listed companies, eventually through the big cap, we value chains through supply chain, it will touch each and every SME. And many of them are struggling with maintaining their business. If we can automate as much sustainability data generation collection and reporting, I think that would also facilitate faster adoption of ISSB standard to benefit this global public policy agenda.
Mandi McReynolds
I think that's a really exciting point because there is this collide of innovation and finance. Paul, the other theme that I think about is Finance Day. Finance Day is happening on the Monday, December 4th, will be partially dedicated to focusing on how finance can play a critical role in addressing climate change. Tell us what your thoughts are as you think about finance and sustainability coming together. I know you recently wrote an article that said, “Let's make accountants accountable. There's something like accountable countin', something along those lines, which is a pretty good play on words. And I'd love to hear how this plays a part in the climate agenda.
Paul Druckman
Yeah, I mean, I have to say, when on the previous podcast that we had, I talked about changing the title of the CFO, the Chief Finance Officer to being the Chief Value Officer. Changing, you know, changing the whole mindset, you know, in terms of the responsibility of finance. It's very interesting, actually, in the UK, our wonderful government have announced that they're pulling back a bit on some of the measures to help with things like not selling any more petrol and diesel cars, etc. They're moving the things out. And it was interesting that the accounting bodies got together and wrote an open letter to the Prime Minister saying this doesn't make sense in the long, you know, if we're actually looking at the broader aspects. And this is not an accounting issue fundamentally, but it is an issue for finance in my thinking. Because the finance community are, you know, if we're thinking about accounting in terms of finance, because finance can mean different things, but if we're thinking about accounting, the finance community have the ability to understand, to put in controls, to make sure that systems are in place, to bring credibility, you know, both not just in reporting but in the information flows that are all through the organization and the processes that are being undergone. And they, at their peril, will not stay in the lead on these things going forward as we move into the world of sustainability. And I truly believe that there is, and in fact IFAC, which is the International Federation of Accountants, the sort of global body, are really, really strong on this and trying to make sure that the profession actually evolves, challenges itself and moves forward. Just as an anecdote, Mandi, in the 1980s, right, I'm showing my age here, I was involved in a software house that produced statutory accounts, with floppy disks in IBM PCs. Organizations like Workiva, when I look at what Workiva can do, and I look at what we did in the 1980s, we were pretty naive. But nonetheless, joining up what Jingdong said is that actually that innovation and that technology allied to the skills of the finance, you know, skills that are there really can make this a difference and can provide information for the organization to make sure that it is actually fit for purpose going forward into 2030 and beyond. And you guys have a huge responsibility to make sure that the corporates especially have that ability to do it with so much data around and so many different routes to understand the data. But the accounting profession is your, to my mind, the biggest ally to make sure that it really does happen. Otherwise, we'll be blown away with data.
Mandi McReynolds
Thank you both for your reflections around innovation, around finance as we look forward to COP happening next week. Now this is our final question, final moment for quick thoughts from the both of you. 2023 has been this pivotal year for sustainability and finance. And shortly after the ISSB issued their first standards, the European Commission adopted the ESRS, a set of rules that companies will have to follow and comply with for the corporate sustainability reporting directive.
By some estimates, they think this is going to impact over 50,000 companies around the world. We're dealing with some of the issues that we talk about at COP and Climate Week, which is macroeconomics and uncertainty, and which can stall growth and can stall investments. So what advice do you have for leaders heading into 2024? Jingdong, would you mind kicking us off?
Jingdong Hua
Yeah, so I think from our perspective, adopting ISSB standards will provide companies with opportunities to increase their sustainability resilience, especially on climate. So this is certainly something that will help them during times of volatility instead of being a burden. I think that's the first I wanted to say. And this is why second that since we were born at COP26. So each COP serves as sort of a milestone for us to check progress. At COP27, African ministers made a joint statement embracing early acceptance or early adoption of ISSB being in Africa, and believing that early adoption would attract global investment. And as a matter of fact,
Nigeria's finance minister personally made a commitment for Nigeria to be one of the earliest adopters of ISSB standard. So we certainly look for similar more momentum coming up at COP28 for our world. We also at COP27 launched our global partnership framework for capacity building, believing that in addition to making the standards, it is our commitment and our duty to make sure the global South feel as ready as the global North in terms of adopting our standard so that this is a truly global language instead of just spoken by a few. And therefore, at COP28, we probably will be able to share our progress in terms of those partnerships, the curriculum, or the training material, education contents that we are working on in terms of supporting those companies' readiness to early adopt our standards. So watch this space, watch our monitor our website and monitor our communication and our LinkedIn. I think exciting things will come up in the next couple of weeks.
Paul Druckman
Just from my point of view, I mean, COP 28 is the halfway point, isn't it? Between the Paris Accord and 2030, which where so much had to happen. And we are so far away from being halfway along the journey. But as Jingdong so rightly said before, the train has left the station. It just seems to have been going uphill a little, in its acceleration rather than downhill. But just moving on to advice, my advice is we need to drive better business behavior. Okay, and that's right across the capital markets. When, comply with the standards, prepare for the legislation, yes, lead. Don't wait for the legislation, prepare for it. Consider wider value towards evaluating impacts because that's next. You know nature is the big force that's coming forward, you know TNFD coming forward, which the ISSB will have to make decisions about in the near future. So we do need, don't just comply, comply and think and follow what’s going on. All enroute to integrated thinking, all enroute to having a business and a whole capital market system that thinks right through these issues, not just how to.
Mandi McReynolds
Well, let's all continue on that train going uphill as quickly as we can. Paul and Jingdong, thank you for joining the show. It was such a wonderful privilege to have you both on as we head into COP next week.
Paul Druckman
Thank you very much, Mandy.
Jingdong Hua
Thank you for the opportunity.
Mandi McReynolds
And thank you all for joining us on this episode o ESG Talk brought to you by Workiva, the world’s only unified platform for financial reporting, ESG, audit, and risk. Stay tuned for next week! We’re closing out this season with a very special episode featuring all four ESG Talk hosts. Andie, Steve, Ernest, and myself will all be reflecting on how ESG has evolved in 2023 and share our great predictions for 2024. In December, we will be taking a brief hiatus to replay some of our favorite episodes from Season 1 and 2. We’ll be combining episodes around similar topics like measuring the ROI on sustainability and taking a look at how the role of the Chief Financial and Chief Sustainability Officers are changing. And of course, we’ll be kicking off Season 3 of ESG Talk at the start of the new year. As always, if you enjoyed this episode, please rate and review us on Apple Podcasts and subscribe to future episodes on Apple, Spotify, or YouTube. We’ll talk real soon.