SEC Commissioner Hester Peirce has weighed in on an IFRS proposal to create a new International Sustainability Standards Board (ISSB), finding deep flaws with the idea of a new board to oversee globally aligned sustainability reporting standards. In a comment letter to IFRS, Peirce said that although the ISSB would be separate from the International Accounting Standards Board (IASB), also overseen by IFRS, the new board would raise serious governance concerns and potentially undermine IFRS’ important investor-centered work.
Imprecise and subjective purpose and scope. In Peirce’s view, the creation of the ISSB would risk misleading investors. The purpose of financial reporting—to paint an accurate financial picture of a company for investors—lends itself to objective, auditable, quantifiable, and comparable metrics.
In contrast, sustainability standard-setting is an inherently more subjective, less precise, less focused, more open-ended activity, said Peirce. Not only is the term "sustainability" imprecise, but the objective of sustainability standard-setting and sustainability reporting is not universally agreed upon and is not consistent over time.
Peirce outlined several issues with sustainability standards:
- Sustainability standards are "intentionally laden" with judgments about where capital should flow, a concept foreign to financial reporting standards;
- Sustainability standards are "unlikely" to foster the same degree of accuracy, comparability, objectivity, and reliability across the reporting of a wide range of issuers that financial reporting standards do;
- IFRS acknowledges that the ISSB’s focus will shift over time from investors to the larger set of stakeholders, which could lead to mission creep;
- Weaving sustainability standards and financial reporting standards together is less likely to create synergies than to make it more difficult for investors to analyze financial reports.
Specifically, Peirce stated the following concerns:
- Adding another board under the Foundation’s umbrella will cost the Foundation time, resources, and attention;
- Expertise in financial accounting and expertise in sustainability are two distinct skill sets, and bringing sustainability experts on as trustees or advisory council members could dilute attention from accounting standards and financial reporting expertise;
- The trustees will be required to consult with both the IASB and ISSB in appointing the Foundation’s executive director, which will dilute the Foundation’s and the executive director’s attention on accounting standard-setting;
- Technical staff will be accountable to the chairs of both the IASB and the ISSB, which will result in a weakening of the technical staff’s single-minded focus on technical accounting issues;
- Full-throated support of the ISSB will be a requirement for all trustees, which means that people who do not equally value sustainability reporting and financial reporting will be ineligible to serve on the Foundation,  thus limiting the perspective diversity the Foundation values.
Governance concerns. Peirce also found fault with decisions about governance of the new board. She noted that IFRS has acknowledged that the constitutional provisions applicable to the ISSB will not be identical to those applicable to the IASB, and has explained that lower standards are appropriate "to allow for the new board to reach an appropriate level of maturity in its standard-setting and develop its technical expertise within the confines of the Trustees’ strategic direction."
Peirce sees the following as potentially problematic:
- The proposal would permit the ISSB to have a higher number of part-time members than the IASB—up to 6 of 14 compared to only 3 of 14 for the IASB. This heightens conflict of interest concerns as outside employment may impair part-time members’ objectivity;
- ISSB’s standards would require approval by only a simple majority of members, compared to the IASB’s standards which require approval by a supermajority of members. Because the chair would be allowed to cast an additional vote in the case of a tie, only seven members of the board would have to vote in favor of a sustainability standard for it to be approved;
- A provision that requires the ISSB "to establish and maintain liaison with relevant stakeholders with an interest in sustainability reporting standard-setting" raises independence concerns;
- The geographic composition of the ISSB would give one less guaranteed member to each region (other than Africa, which only has one board seat on the IASB) in favor of more at-large members. This could erode the ISSB’s independence and objectivity. Peirce recommends giving more representation for the Americas and perhaps another seat for developing nations.
- IFRS’ hurried approach to starting the ISSB raises the likelihood of design flaws in the board and the standards it ultimately produces.
- Questions around ISSB’s funding also raise concerns, as it is not specified where funds will come from and even IASB’s funding structure presents independence challenges.
Popularity of ISSB proposal. Peirce’s criticisms may be sailing against the wind, however. IOSCO has stated it sees "strong support" for the proposal. In two roundtables, stakeholders were united in their support for globally aligned sustainability reporting standards. Some participants worried that voluntary disclosure would not be enough and expressed support for mandatory reporting requirements aligned across jurisdictions, along with frameworks for audit and assurance.
Participants also urged that discussions noted that the design of ISSB standards should allow for interoperability, not only with jurisdiction-specific requirements that go beyond enterprise value creation, but also for the expansion of scope to other sustainability topics beyond climate and ongoing standards evolution to accommodate the dynamic materiality of sustainability topics over time.