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opinion | Can ESG contribute to the resilience of our countries?

By Emmanuel Faber (Chairman of the International Sustainability Standard Board)

Nothing in climate matters can be done without ambitious public policies. But it is not enough to impose rules on economic actors to succeed: in the face of climate change, only a global approach can do so. But the time for institutionalized multilateralism is over, one of its last manifestations being the COP21 in Paris where a difficult but ambitious consensus was found . It was in 2015.

In this context, ESG – the alphabet of capital markets for sustainable development – ​​is indispensable for two reasons. First, States can only hope to resolve global issues such as the climate, food, water or pandemics if they leverage the power and ingenuity of the markets. By construction, these are the source of organic funding for the investments required for the transition of business models towards a more resilient economy.

And they can scale the solutions. Just consider how much they have shaped (for better and worse) our ways of life for over fifty years. In preparation for COP27, the provision of the 100 billion euros promised by rich countries to poor countries to support the transition is legitimately discussed between States. But these are orders of magnitude a thousand times greater than the markets could cause to migrate.

Financial markets connect all economies

Second, in the absence of multilateral momentum and given the urgency, there is no more global mechanism to propagate the transition than financial markets, which connect all economies. However, they will only play this key role if they work from reliable and comparable information, adapted to their needs for investment decisions. Creating this language is the role assigned by G20 leaders, multilateral institutions, IOSCO and others to the IFRS Foundation’s International Sustainability Standards Board, announced at COP26 in Glasgow last November.

To build the necessary multilateralism, we began by creating an inter-country working group which today brings together China, the United States, Japan, the United Kingdom and the EU. With the latter, our dialogue is framed by the European directive relating to these issues which specifies: “The EU standards must take into account the reporting standards developed under the auspices of IFRS and contribute to the process of convergence of sustainability reporting at the global level, by supporting the work of the ISSB. They will have to reduce the risk of inconsistent reporting for companies that operate globally by integrating the content of the international ISSB database insofar as it is consistent with the legal framework and the objectives of the European Green Deal. The goals of the Green Deal will not be achieved without anchoring its rules to the power of global capital markets. Conversely, we need the European contribution to the construction of international standards.

The need and demand for alignment is there. Among the points to be discussed: “What matters, and should therefore be subject to an ESG information obligation? This is technically the subject of “materiality”.

Count what matters, for everyone

In the political, academic and impact spheres, we debate materiality outside-in or inside-out, simple or double, financial or non-financial. We must achieve that the European political conceptual framework of “full materiality” is interoperable with the language of the capital markets of so-called “financial” materiality. The apparent opposition between these approaches must be overcome to understand their necessary complementarity if we want the alphabet of ESG to one day massively move capital allocations. We will rely for this on the strength of the concept of materiality from the basis of accounting standards, and its untapped richness which makes it possible to draw extensively on the impacts of the company on its environment (inside-out) and to integrate investor choices that are not directly translatable into monetary terms.

Finally, it is important to recognize that materiality in sustainability is constantly evolving at the intersection of social science, public policy and economics. We must have the agility to take these developments into account with the idea of ​​“dynamic materiality”.

“Counting what matters, for everyone. As complex as it may be, in the coming months, this conceptual alignment is fundamental work so that ESG standards allow capital markets to be true allies of public policies for a just ecological transition.

Emmanuel Faber is Chairman of the International Sustainability Standard Board.

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