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Sustainability now: Operationalizing the ISSB standards · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought leadership from PWC's national office.
• 0:10
  SPEAKER_03: Hello, I'm Heather Horn, PWC's U.S.
• 0:13
  SPEAKER_03: Sustainability Technical Leader, and welcome back to PWC's Accounting Podcast.
• 0:17
  SPEAKER_03: This is Sustainability Now.
• 0:19
  SPEAKER_03: In today's episode, guest host David Challen, PWC's sustainability partner, is joined by Linda French, Global Head of Sustainability Policy and Regulation at JPMorgan Chase, and Tim Adamson, Chief of Staff on the City Corporate Sustainability Team, for discussion on the evolving state of ISSB implementation across the financial services industry.
• 0:40
  SPEAKER_03: Together, they explore insights from a recent PwC and Institute of International Finance Survey, including how firms are approaching materiality assessments, the challenges associated with anticipated financial effects, and the broader opportunities and complexities tied to sustainability reporting and ISSB adoption.
• 0:59
  SPEAKER_03: A couple quick notes before we get started.
• 1:02
  SPEAKER_03: If you're listening and would like to watch this episode, please check out the show notes for a link to the video, as well as additional sustainability reporting resources, the full survey findings and related PWC thought leadership on ISSB implementation and sustainability reporting developments.
• 1:18
  SPEAKER_03: With that, let's watch their podcast.
• 1:22
  SPEAKER_02: Welcome, Tim, Linda.
• 1:24
  SPEAKER_02: So excited to have you both joining with me today to host this PWC podcast.
• 1:28
  SPEAKER_02: I was a little surprised that Heather gave me the keys to the studio, but I think we have a really exciting uh conversation today.
• 1:34
  SPEAKER_02: I know I'm a new voice, probably for many of our listeners, so I'll just start off with a quick introduction of myself and then I'll hand it over to yourselves to introduce yourselves as well.
• 1:42
  SPEAKER_02: So I'm David Challen.
• 1:44
  SPEAKER_02: I'm a partner.
• 1:45
  SPEAKER_02: I always like to say I'm a proud CPA by background.
• 1:48
  SPEAKER_02: I've been in the financial services industry for too many years.
• 1:51
  SPEAKER_02: I don't want to say how many because it gives away my age.
• 1:54
  SPEAKER_02: Um, but I've been in the New York market uh for quite some time.
• 1:58
  SPEAKER_02: And uh when it comes to sustainability, uh about four or five years ago, started to have a more focus on sustainability reporting, helping from both an assurance side as well as helping some of our clients from a consulting advisory side with their reporting.
• 2:10
  SPEAKER_02: Uh but maybe Linda, I'll pass it to you to give an introduction for yourself.
• 2:15
  SPEAKER_04: Great.
• 2:15
  SPEAKER_04: And thank you for having me.
• 2:17
  SPEAKER_04: So Linda French, I'm global head of sustainability policy and regulation at JPMorgan Chase.
• 2:23
  SPEAKER_04: And I lead the firm's engagement globally on financial policy and regulation and the kind of intersection with climate and sustainability.
• 2:32
  SPEAKER_04: So climate sustainability disclosure has been a huge focus for a long time and really looking to bring the insights that we have as a firm around our experience doing voluntary disclosure, doing regulatory jurisdiction disclosure in different jurisdictions to kind of help inform the process, both from a standard setter perspective with ISSB as well as different jurisdictions that are adopting.
• 2:58
  SPEAKER_04: So I've been involved in ISSB since the very beginning, and I'm a bit of an ISSB nerd and absolutely delighted to be here for this.
• 3:08
  SPEAKER_02: Tim.
• 3:09
  SPEAKER_01: Great.
• 3:10
  SPEAKER_01: Um thank you for the invite.
• 3:11
  SPEAKER_01: Um uh glad to be here.
• 3:13
  SPEAKER_01: Uh Tim Adamson, I'm the chief of staff on the Citibank Corporate Sustainability team.
• 3:18
  SPEAKER_01: Um, I've been in this space for about five or six years now, have a background in uh also a CPA, started off as a CPA and then got into risk um post-crisis when everyone seemed to get into risk management.
• 3:30
  SPEAKER_01: So um my role is what you would expect it to be, a lot of running the department.
• 3:35
  SPEAKER_01: But given that the expansion in the role and the remit of corporate sustainability functions, um a lot of developing disclosure frameworks and target operating models, having that background as a CPA, understanding how reporting works.
• 3:47
  SPEAKER_01: Um, but also, you know, risk is the underpinning to all reporting anyway.
• 3:51
  SPEAKER_01: So understanding how certainly financial services firms think about risk as well, um, has given me a good grounding in understanding sustainability and sustainability disclosure.
• 4:01
  SPEAKER_01: Um, and also along the route as well.
• 4:03
  SPEAKER_01: Um, I've worked a lot with regulators and auditors.
• 4:06
  SPEAKER_01: So having that interaction, especially post-crisis when there was a lot of uh attention and focus there, um, has helped in this role.
• 4:13
  SPEAKER_02: That's great.
• 4:14
  SPEAKER_02: So today we're gonna talk a bit about the uh implementation, state of play around ISSB reporting.
• 4:20
  SPEAKER_02: And um maybe what I'll do is I'll set the mood a little bit in terms of provide some context for what led to the discussion today.
• 4:26
  SPEAKER_02: Um it really came on the back of an effort that PWC worked with the Institute of International Finance, IF, on doing a survey amongst its members around ISSB reporting and how those opportunities and challenges associated with that.
• 4:41
  SPEAKER_02: Um we worked, uh the survey was conducted about six months ago.
• 4:46
  SPEAKER_02: Uh, we sent the survey to 90 of its members.
• 4:48
  SPEAKER_02: We got 24 responses, so maybe a little less than we wanted, but to turn that frown upside down, the good news was they did cover all different jurisdictions.
• 4:56
  SPEAKER_02: So across those 24, it was all different parts of the world.
• 5:00
  SPEAKER_02: Um, and they covered a number of different types of financial institutions, whether they were investment banks, asset managers, and others.
• 5:05
  SPEAKER_02: So at least we've got a good cross-section.
• 5:08
  SPEAKER_02: Um, and from a sizing perspective, these were tending to be larger organizations.
• 5:12
  SPEAKER_02: So they did have uh say over 50,000 employees, so bigger organizations, but probably those you typically expect to have some sort of impact in today with regards to where they're operating and having ISS be reporting either required or they're looking to implement it on a voluntary basis.
• 5:29
  SPEAKER_02: So coming out of that survey, uh there were some, you know, I thought some interesting, you know, findings that we wanted to kind of dive a little bit with uh with and get your guys' perspectives on today.
• 5:38
  SPEAKER_02: Um, so the first question or first kind of finding that came out that um I thought would be good to get your guys' take on is just around the state of play with regards to how ISSB reporting is being used as a baseline or not with regards to the broader sustainability reporting framework.
• 5:55
  SPEAKER_02: So if I think about the context of when the IFS Foundation kind of came up with the ISSB around late 2021, one of the cornerstones for that was to try to create this baseline of reporting standards.
• 6:07
  SPEAKER_02: And what we saw through the questions is that many of the companies that are reporting ISSB, whether voluntary or mandatorily, are still referring to a number of other different frameworks out there like GRI and TCFD.
• 6:21
  SPEAKER_02: Um and so wanted to kind of maybe start with you, Linda, in terms of your take.
• 6:25
  SPEAKER_02: If you think about you know the purpose and maybe some of the reasons for why we haven't yet seen that um coalescent around you know using ISSB more as a universal baseline for companies.
• 6:37
  SPEAKER_04: So I was not surprised kind of by by the survey results at all.
• 6:41
  SPEAKER_04: And the the way I would think about it is that TCFD GRI disclosure is is really looking to accomplish something different than ISSB, or rather, ISSB is looking to accomplish something different.
• 6:56
  SPEAKER_04: So, you know, from the perspective of um TCFD reporting, voluntary TCFD reporting in the US, historically it's really been about you know there's a larger set of information that investors that stakeholders are interested in that goes beyond what's in the company's kind of 10K and being able to kind of put it in a separate report in a format that investors can easily access.
• 7:24
  SPEAKER_04: Um there, you know, that that's something that you know JP Morgan Chase, City, many other large companies do.
• 7:32
  SPEAKER_04: When you look at what ISSB is intending to do, it's really taking this financial reporting lens.
• 7:39
  SPEAKER_04: And uh I I think it's very important that it is it is not simply TCFD plus, because I think there's a often a perception out there that S2, new ISSB's climate disclosure standard, is effectively TCFD plus a couple additional kind of provisions.
• 7:59
  SPEAKER_04: And uh when in fact it's a it's a completely different paradigm, it's instead the S1 materiality assessment constructing that and uh you know it's a financial reporting materiality assessment and then applying that to S2, where a company might find that you know it there is effectively nothing material in S2 kind of to report.
• 8:22
  SPEAKER_04: So you could end up with a lot less disclosure under ISSB than you end up with kind of under TCFD.
• 8:30
  SPEAKER_04: So I'm I'm not surprised at all that ISSB is not necessarily reduced, not necessarily reducing the need for that other disclosure.
• 8:42
  SPEAKER_04: Because I mean, and investors don't they don't like it when you take information away that you are already providing to them.
• 8:49
  SPEAKER_04: So I would I would be surprised if um companies that are doing ISSB disclosure where they're doing a much smaller amount of disclosure than on the TCFD side, if if they would, for example, completely pull kind of their their TCFD disclosure.
• 9:07
  SPEAKER_04: So I think about their, you know, their some of these frameworks, they're accomplishing they have different objectives and they're accomplishing different things.
• 9:16
  SPEAKER_04: So it doesn't surprise me from you know from that perspective.
• 9:19
  SPEAKER_02: Tim, what are your thoughts about do you see there's going to be a convergence to ISSB, or do you still see a role for these other frameworks will just continue on similarly for because there's different needs being met, different stakeholder needs being met by some of these other frameworks?
• 9:32
  SPEAKER_01: Yeah, precisely.
• 9:33
  SPEAKER_01: And I think I think Linda captured it well.
• 9:36
  SPEAKER_01: Um they do serve a different purpose.
• 9:38
  SPEAKER_01: There's there's obviously a lot of overlap, there's a lot of commonality there.
• 9:41
  SPEAKER_01: So there will be rationalization, but I think you know, the different lenses that are applied uh result in different outcomes.
• 9:47
  SPEAKER_01: So, you know, the audit requirement of a regulatory report is going to um cause there to be more scrutiny, uh, more careful wording as to what we're saying about.
• 9:57
  SPEAKER_01: But the voluntary reports, um, you know, firms are very much more lent into them.
• 10:02
  SPEAKER_01: It was to tell the narrative of your you know, corporate uh sustainability, corporate responsibility, overall kind of um environment.
• 10:09
  SPEAKER_01: Um, but the ISP has a distinct focus.
• 10:12
  SPEAKER_01: If you look at um CSRD as well, that has the GRI type um impact lens as well.
• 10:17
  SPEAKER_01: So they all offer a different output.
• 10:20
  SPEAKER_01: Um, so yes, there will be convergence, but will they all converge around converge around one report or one uh standard?
• 10:26
  SPEAKER_01: Um probably not.
• 10:28
  SPEAKER_01: Um, but we'll see how it plays out.
• 10:29
  SPEAKER_02: Yeah, and if I maybe I'll always I always like to try to analogize a little bit to the financial reporting world, um, because I think that resonates with um with solid on a lot of our listeners as well.
• 10:39
  SPEAKER_02: And I could see potentially a world where you have from a compliance perspective, if there is widespread adoption amongst countries that would require ISSB reporting to meet that need, but when you then also add to that on a voluntary basis, if I think about financial reporting where you submit your 10K, but then you might have non-gap kind of additional metrics and disclosures in your earnings release or other parts of your website.
• 11:04
  SPEAKER_02: So, you know, maybe there's a world where again you have the compliance report where you're following one framework, but then you add to it to meet there are other stakeholder needs beyond purely just the financial users that you want to get your information out for.
• 11:16
  SPEAKER_02: So, Linda, you mentioned key takeaway too coming out of the survey, which um I believe was around looking at the state of adoption in terms of um those that are having to do it on a compliance perspective, but also those that are doing it voluntarily and where they are um at in that.
• 11:32
  SPEAKER_02: So interested in in your kind of uh views on on that one.
• 11:36
  SPEAKER_04: Yeah, so I I suspect there's a different, there's another layer deeper here in the responses um to the question about your organization's current regulatory or voluntary alignment status with um with ISSB, and because I would differentiate between ISSB adoption as effectively mapping your disclosure to ISSB S2 versus voluntary adoption, meaning that you have constructed the materiality assessment framework from S1, applied it to S2, and then included that information in your financial reporting.
• 12:18
  SPEAKER_04: So, you know, in in I I think in the US, effectively in your 10K.
• 12:22
  SPEAKER_04: So those are two very different things.
• 12:26
  SPEAKER_04: And uh I I suspect that um many companies that are voluntarily adopting are doing the first where they are mapping and they're they're doing TCFD plus and mapping their just their voluntary disclosure to S2.
• 12:44
  SPEAKER_02: Tim, anything uh to add for that one?
• 12:46
  SPEAKER_01: Yeah, I I think that's a fair point.
• 12:48
  SPEAKER_01: Um in in terms of um what is being reported, so you know, if you're not required to report but you do voluntary report, um, you know, clearly you see there's some benefit to that.
• 12:58
  SPEAKER_01: So obviously the market is sending signals that they want to receive this information, um, be it from a risk management perspective, looking at the downside, looking at your exposure to climate, et cetera, but from the upside as well, you know, there are investors who want to have um investment themes, so they want to understand more about that.
• 13:16
  SPEAKER_01: So, yes, you might not be required to do a report, but if you provide that information um at a sufficient level of granularity that the investors want to see, um, or if you've got a you know really good story to tell, um you want to go beyond that, I think that that only benefits you.
• 13:30
  SPEAKER_01: So a lot of jurisdictions are implementing ISSB.
• 13:34
  SPEAKER_01: We've we've it's very nascent.
• 13:35
  SPEAKER_01: We've still yet to see all the jurisdictions that that roll that out.
• 13:39
  SPEAKER_01: But I think in most large developed economies, there probably is a presumption that the that ISSB will be implemented, um, outside of Europe, obviously, and then whatever the US does there, but in in the rest of the world.
• 13:50
  SPEAKER_01: Um, so they may not be uh mandatory now, but if you're competing in the capital markets for funding with uh companies that are in uh jurisdictions where uh the rule is mandated, then you would think in most cases it behooves you to provide that level of information.
• 14:05
  SPEAKER_01: So there's in some ways there's a there's a getting ahead of that, but you know, even in jurisdictions where maybe they don't think ISSB will come out at all.
• 14:14
  SPEAKER_01: As I say, you know, from an investor uh relations perspective, I think it has benefits there as well.
• 14:20
  SPEAKER_02: So maybe moving us on to the next one, we did have a question in the survey where we were asking the members around what top opportunities or benefits did they see when they went through uh an ISSB implementation in their organization.
• 14:35
  SPEAKER_02: And the three that kind of rose to the top was um one was around uh stronger strategic alignment in linking the risks and opportunities to their policies and strategies.
• 14:44
  SPEAKER_02: Uh another was being able to connect sustainability performance to financial value creation.
• 14:49
  SPEAKER_02: And then the third was around greater transparency in reporting amongst peers.
• 14:53
  SPEAKER_02: I wasn't surprised by the third one.
• 14:55
  SPEAKER_02: I would certainly think that's again kind of one of the cornerstones for having ISS be a commonality-based line to try to enhance comparability amongst um amongst markets and industries.
• 15:04
  SPEAKER_02: Um but I did find the first two, you know, interesting um that people saw this benefit coming from a strategic, you know, alignment and value creation.
• 15:12
  SPEAKER_02: Um maybe Tim, I'll start with you.
• 15:14
  SPEAKER_02: If I think about your city, I know you guys have been doing sustainability reporting uh for many, many years at this point, um, and you're operating in a lot of parts around the world.
• 15:25
  SPEAKER_02: So I know you're going through various ISSB implementations and others like Europe with CSRD and others.
• 15:31
  SPEAKER_02: So I guess from your perspective, um, any thoughts as your organization who's been doing sustainability reporting voluntary, um, but now going through more of a this kind of compliance exercise that some view it as, do you see any, you know, some of these benefits coming through as you're going through these implementations?
• 15:48
  SPEAKER_01: Yeah, and I I see a linkage between you know the third point around the transparency and the first point around the strategy.
• 15:55
  SPEAKER_01: So um in some ways, you need the information to inform the strategy that the transparency provides.
• 16:01
  SPEAKER_01: So, you know, we understand on a nebulous basis there is some climate risk, but if you don't quantify, you don't know how uh it manifests or you know how large it is for your organization.
• 16:12
  SPEAKER_01: Um likewise, these reporting frameworks talk about opportunities.
• 16:16
  SPEAKER_01: So, you know, we know there is an energy transition, we know there's a certain level of investment, but it's it's very nebulous, it's hard to sort of pin down.
• 16:23
  SPEAKER_01: But the more you uh introspect, the more you do your materiality analysis, you look at your risks, you look at your investments, um, that feeds up into information that um the folks at the top of the house can actually use when that will inform the strategy.
• 16:36
  SPEAKER_01: So, you know, in banks, we love numbers, we love decks, we love analysis.
• 16:41
  SPEAKER_01: Um, if you can put that, you know, in a transparent deck that gets in front of the CFO, the CRO, and that you know, ultimately will feed up to the management chain, to the uh the board as well.
• 16:50
  SPEAKER_01: That's that's how you you get the wheels of strategy turning.
• 16:54
  SPEAKER_01: So I think it is correct um that strategy is a beneficiary of this.
• 16:59
  SPEAKER_01: I would say it's very nascent.
• 17:01
  SPEAKER_01: I I would say it's probably gonna really take a few years to manifest and you know that that stepping stone from transparency to be baked into strategy as the reporting is is matured.
• 17:12
  SPEAKER_01: Um but directionally, you know, I do agree with that for sure.
• 17:15
  SPEAKER_02: And something you said there, Tim, um, that resonated and it came out through some of our discussions with the Membes as members as well when we were talking about the survey was the fact that it is an integrated report.
• 17:25
  SPEAKER_02: When you're doing um this ISSB reporting, it's integrated typically with the financial statements, which then inherently usually requires that extra layer of governance, right?
• 17:33
  SPEAKER_02: Now, if it's going five being filed along with the core financial statements, you typically have that additional layers of maybe board level or subcommittee level oversight as well as that you know management level oversight, which creates maybe additional benefit and resources from the sustainability where uh if they didn't have that same level of oversight with regards to previous reporting, now going through that, um, extra potential rigor is also seeing some benefits with regards to getting additional improvements in the processes, controls and investments in there helping to improve to make this investor grade quality information that's uh that's appropriate to be filed.
• 18:11
  SPEAKER_02: Um, Linda, I feel like maybe you have a bit more of a skeptical take on this one, but I'd love to get your thoughts.
• 18:16
  SPEAKER_04: Yes, well, I am uh I'll pick up on your last comment because I um have very much seen this the shift in this maturing in terms of um where sustainability disclosure or reporting responsibilities sit within a firm and who else is involved across the firm.
• 18:36
  SPEAKER_04: And I think for large financial institutions, many of us have um, you know, for potentially for years now, had whether it's a firm-wide ESG controller, um, you know, had a sustainability reporting, like gone through this process of sustainability reporting, moving from the sustainability team over to finance, um, and uh, you know, having uh applying financial controls and having um, you know, and a number of different folks across the firm involved, whether accounting policy or business management, climate risk, the like a first line.
• 19:15
  SPEAKER_04: Um, so I I I see ISSB adoption more broadly as a kind of continuing to catalyze that type of maturing within organizations.
• 19:28
  SPEAKER_04: And uh the uh the the other thing that I I have heard and from a few investors in terms of opportunities is you know, as a uh as a company, as a disclosure preparer, but then also as a user, going back to kind of TCFD and uh you know, whether um uh this is in and the different paradigm between here is information in a somewhat standardized format that you think investors are generally have said they're generally interested in, versus the ISSB financial reporting paradigm, where um, you know, to to Tim's point around strategy, you're really sharpening kind of the focus on financial materiality.
• 20:11
  SPEAKER_04: And uh there might be a lot less information in an ISSB report, but it very clearly signals to investors this is the information that is the most important if you were looking at this through again a financial reporting lens.
• 20:26
  SPEAKER_04: And uh I so I see that as kind of a potential opportunity as well.
• 20:30
  SPEAKER_02: Well, you mentioned materiality, um, and that was one of the themes coming through the survey.
• 20:36
  SPEAKER_02: So maybe we'll pick up on that and and and hit that one now.
• 20:39
  SPEAKER_02: So just to give some context, there were a number of questions in the survey around for organizations as they were setting their materiality framework for their ISSB reporting.
• 20:48
  SPEAKER_02: Were they starting with a quantitative or was it qualitative?
• 20:52
  SPEAKER_02: Were they looking to leverage some of their other materiality frameworks that they had established, whether it was for CSRD or GRI?
• 20:58
  SPEAKER_02: And I'd say what came through from the responses was the fact that it was uh really all over the map, my words, in terms of the responses back, meaning there wasn't uh a consistent trend.
• 21:09
  SPEAKER_02: Organizations were doing all different things, whether it was a top-down approach, bottoms-ups approach, et cetera.
• 21:14
  SPEAKER_02: And I think that's really interesting when I take a step back because materiality is a foundation for the report itself, meaning that you know it starts with identifying what is material to the primary users of the financial statements, and that's really going to drive the extent of the disclosures.
• 21:32
  SPEAKER_02: And so if you have comparable companies that have maybe similar types of size and footprints, risks and risks associated with their businesses, but how they're thinking about materiality is very different.
• 21:46
  SPEAKER_02: Um, that could create some challenges for users who are picking up two different reports, and you might have two different looking reports because of how that materiality lens was applied.
• 21:57
  SPEAKER_02: Um, and so what kind of signals does that?
• 22:00
  SPEAKER_02: Give to to the reader and how do they try to decipher through that?
• 22:04
  SPEAKER_02: Um so maybe with that kind of preamble, and I know uh Linda, you've got some great thoughts on this one.
• 22:10
  SPEAKER_02: So maybe I know you're you're itching to get in.
• 22:13
  SPEAKER_02: So maybe love to get your reactions uh and thoughts on the materiality conversation.
• 22:16
  SPEAKER_04: So I I genuinely think the survey responses to this question are fascinating because it it goes to um it goes to what we were talking about earlier with is this TCFD plus or is this an entirely is this a different and new financial reporting paradigm applied to um applied to climate-related information?
• 22:38
  SPEAKER_04: And uh the the materiality assessment framework in S1, like that step is what makes ISSB ISSB as opposed to simply TCFD Plus.
• 22:50
  SPEAKER_04: The challenge is that there are um there are all these materials that ISSB has provided around educational and resources, um, has put a a lot of effort kind of into trying to help the market, try to help regulators kind of figure out how to approach this.
• 23:08
  SPEAKER_04: But it's fundamentally going to be really challenging to end up with any kind of consistent market practice at the start, is my sense.
• 23:19
  SPEAKER_04: Um because you don't have decades of market practice and audit practice that has kind of developed over the years the way you do with financial reporting.
• 23:29
  SPEAKER_04: And I think one of the interesting questions is do you start with um if you are a global firm like like ours, do you know do you start with a uh you know a basically a centralized framework that then the leak different legal entities kind of apply?
• 23:49
  SPEAKER_04: Or um, you know, based on the survey results, it looks like there are uh you know, some firms are maybe taking this at the legal entity kind of level.
• 23:59
  SPEAKER_04: Uh but I I think again, because there aren't kind of these these market standards and practices that have developed yet, you could potentially end up even within the same firm with very different approaches in different jurisdictions.
• 24:12
  SPEAKER_04: And you know, I I think another interesting question will be the degree to which auditors are also, and you can speak to this, auditors are also figuring this out as as we all go.
• 24:24
  SPEAKER_04: And uh the um, you know, as you're working with your audit partner around what what your materiality assessment framework looks like, and then how you apply that to S2, I I it it may be all over the map for the next couple of years.
• 24:42
  SPEAKER_04: And and part of the challenge around that is that, for example, if you end up with two conservative approaches, then you really lose that sharpening I was talking about with ISSB.
• 24:54
  SPEAKER_04: Like do you really end up with more like TCFD Plus, which ISSB will tell you defeats the purpose of this?
• 25:00
  unknown: Yeah.
• 25:00
  SPEAKER_02: And Linda, I was thinking about a conversation I know we had a few weeks ago on this.
• 25:05
  SPEAKER_02: And, you know, ISSB, when it comes to materiality, they make a reference.
• 25:09
  SPEAKER_02: Well, it's the same materiality concept you're applying for financial reporting, uh, which is you know, your primary users, if you were to omit this, would that be considered important information, material information to potential investors, creditors, and debtors?
• 25:22
  SPEAKER_02: Which might sound simple, but still when you're trying to apply that in this type of area, it's not.
• 25:27
  SPEAKER_02: So, you know, companies like yourselves have different types of investors, right?
• 25:31
  SPEAKER_02: You might have a Nordic pension fund investor or a US teacher's pension fund, right?
• 25:37
  SPEAKER_02: So for financial reporting, they probably both care about the same things of long-term profitability and liquidity.
• 25:43
  SPEAKER_02: But when you get to some of these topics, right, one of those investors might see, hey, if you omit uh, say, climate information, that would be material to the Nordic pension fund.
• 25:52
  SPEAKER_02: But maybe uh another uh US teachers pension fund doesn't see that as the same level.
• 25:58
  SPEAKER_02: So I don't know if you want to add to that, but I think it just adds, it is not maybe as a simple exercise when you're really thinking about well, what who are my users, who are the primary users of this information, um, particularly this kind of information and and how does that get applied?
• 26:12
  SPEAKER_04: Can I chime in just quickly on that before?
• 26:15
  SPEAKER_04: Um so I the primary users question is really interesting because if you look at, you know, as a um as a US trained lawyer, if you look at the definition of materiality in in the context of the SEC, you're really talking about a reasonable, a quote, reasonable investor.
• 26:32
  SPEAKER_04: Versus if you look at what what we're seeing in some other jurisdictions around how they're defining like primary users, sometimes it's a bit broader and it's a bit different than we what ISSB has in there.
• 26:44
  SPEAKER_04: So it it gets back to this question around when you don't have clear, when you don't have clear um kind of years of practice that have developed and you don't have kind of the the um you know more standardized, like quantified um definition of you know, here's the kind of bright line threshold for materiality, a lot of this is going to be qualitative.
• 27:10
  SPEAKER_04: And then there's that, and there will be different stakeholders or um investors, or you know, maybe your um uh you know, maybe your auditor who have different views on whether something is qualitatively material or not.
• 27:26
  SPEAKER_04: So I I think that will I think that will be a big challenge.
• 27:30
  SPEAKER_04: Um and uh and also goes to, I think, you know, some of the the findings in the survey around some of the most um some of the provisions in S2 that people are most concerned about from a preparer perspective, where it is around quantification in these areas that um are historically have not been quantified, and it's not it's often not entirely clear how to do that.
• 27:55
  SPEAKER_02: Yeah.
• 27:56
  SPEAKER_02: And maybe Tim, for for you, like just continuing this materiality, we know we talked a little bit about, you know, again, organizations like both of yours, where obviously you're global, you have footprints and now reporting and different countries like Australia and Turkey having to do you know mandatory ISSB reporting.
• 28:13
  SPEAKER_02: And so when you think about strategically the types of risks that are material and that you're managing towards as a global organization, you know, clearly you have eyes on that and you're managing that.
• 28:24
  SPEAKER_02: Now, when you're having to do reporting in these more legal entity cuts, right, and it's asking for well materiality and the concept of that local country, maybe like how your global, like what's important systemically and globally, doesn't neatly align, and it should, no, not necessarily needs to, because of again, the type of footprint you have in these countries, it's just not the same risks.
• 28:47
  SPEAKER_02: And so, you know, as an organization, you're obviously not gonna be trying to be uh focusing on those at that level.
• 28:52
  SPEAKER_02: But how do you fit that square peg in this round hole of having to now do reporting at these different cuts?
• 28:57
  SPEAKER_02: And maybe that context doesn't come through clearly to a reader.
• 29:01
  SPEAKER_02: Any kind of takes on that as you I know as you're kind of going through that and working through that as an organization of how do you ensure consistent global messaging, but still trying to meet the local needs of of the countries and jurisdictions that are now having to do this reporting?
• 29:15
  SPEAKER_01: Yeah, I I mean it's it's a fair point.
• 29:18
  SPEAKER_01: Um, and I think you can look at it at a number of different levels.
• 29:21
  SPEAKER_01: So, you know, one would be uh the core requirements of the rule as implemented in different jurisdictions.
• 29:27
  SPEAKER_01: So, you know, that's one lens of it.
• 29:29
  SPEAKER_01: You know, we look at how ICB has been adopted in different countries, uh, but by and large, they're relatively similar.
• 29:36
  SPEAKER_01: I think China having the double materiality lens is probably the most the main outlier, Switzerland possibly going that way, other countries may be doing due diligence on it, but I don't want to uh lead anyone in any any direction, so I won't know to speak to specific countries.
• 29:51
  SPEAKER_01: Um, but other differences in implementation seem to rely on transition provisions or adoption provisions, so you get one, two, three-year exemptions from certain provisions of the rule.
• 30:01
  SPEAKER_01: But if you look at it on a long-term target operating model, you know, they're temporary um differences.
• 30:06
  SPEAKER_01: So, you know, the the double materiality in China is the one main outlier, but by and large, the adoption between countries is fairly aligned.
• 30:14
  SPEAKER_01: Um, but to your point, um looking at how you create the reporting between the parent and the legal entities, um, I actually look at this in terms of who is your target audience there.
• 30:28
  SPEAKER_01: So if you're really a sustainability investor, you're probably going to want to invest in the parent.
• 30:34
  SPEAKER_01: Um, you know, the the sustainability profile is derived from the global strategy.
• 30:39
  SPEAKER_01: It's it's going to be similar in the entity as it is in the parent, so there's not going to be a lot of arbitrage opportunity.
• 30:46
  SPEAKER_01: But sustainability profiles don't change very quickly over time either.
• 30:49
  SPEAKER_01: So, you know, they're always going to be fairly aligned.
• 30:52
  SPEAKER_01: So I think the report for the parent is going to be much more focused to uh the public market investor.
• 30:58
  SPEAKER_01: Um, and a legal entity report may well be more um for an audience of a regulator or a lender.
• 31:05
  SPEAKER_01: Um, and so you know, again, there's there's a different focus on who your audience is.
• 31:09
  SPEAKER_01: Obviously, you want to have consistency there, and um there are different realities to different reports you want to do.
• 31:15
  SPEAKER_01: So, for example, you know, biodiversity is much more prevalent in South America, Colombia being you know the world's most biodiverse country by you know some measures.
• 31:24
  SPEAKER_01: Um, we see social issues are more prevalent in you know, more folks in in South America are more interested in those issues as well.
• 31:32
  SPEAKER_01: So there's a pressure for that to be more material because it's more material to them.
• 31:36
  SPEAKER_01: So you will have local nuances as well, but I think there will be a good amount of alignments.
• 31:41
  SPEAKER_01: But again, I think that that difference of who the actual investor is um in some ways should and you know will inform what is material.
• 31:49
  SPEAKER_02: I think that's a great point, Tim.
• 31:51
  SPEAKER_02: And again, that's not a foreign concept with regards to financial reporting.
• 31:54
  SPEAKER_02: To your point, when we think about group reporting, that's typically where the investors are.
• 31:59
  SPEAKER_02: Um, you know, the equity investors, that investors are when you get into more local country reporting, usually that's more for a different purpose.
• 32:07
  SPEAKER_02: The primary user is maybe a local regulator, a regulator, banking regulator, who might is typically focused on different things other than just profitability.
• 32:14
  SPEAKER_02: They're looking at do you have sufficient equity, et cetera?
• 32:17
  SPEAKER_02: And so how we think about what's material for the financial reports does change because it's through that lens of what is this report being prepared for?
• 32:25
  SPEAKER_02: And so what, you know, uh what do we care about?
• 32:28
  SPEAKER_02: And I think you're saying it's the same thing here for sustainability thinking about who the users are.
• 32:32
  SPEAKER_02: And so how how those reports look at the group level to the local uh country level probably may you know might not should not look the same.
• 32:42
  SPEAKER_02: You have different primary users.
• 32:43
  SPEAKER_04: Yeah, and I I think I do think it will be interesting to see how it plays out in terms of the um the degree to which you have uh again large multinational firms that have a that are in a jurisdiction that requires ISSP reporting, that are then able to use that parent-level report to comply in all the different jurisdictions that for which they have ISSP reporting requirements globally, versus firms that maybe do not have ISSB reporting requirements for the parent and instead are taking a legal entity of level approach, where from that perspective, it may be that the business activities of that particular legal entity really don't implicate climate-related risks or opportunities.
• 33:28
  SPEAKER_04: Um, and uh, and and then again, also what that from an internal operational kind of coordination perspective, what that ends up looking like as companies are thinking about the balance between um, you know, doing doing this from taking a centralized type approach and lens for resources that the legal entities can then use to implement.
• 33:53
  SPEAKER_02: So maybe I'll move us on um to now the challenges side.
• 33:57
  SPEAKER_02: So we talked a bit about the opportunities that uh people identified when they're answering the survey around implementation.
• 34:03
  SPEAKER_02: Uh, we also then had a question around what were the top challenges uh that companies experienced as they were going through the ISSB implementation.
• 34:10
  SPEAKER_02: And the top three that uh came out of the survey, one was around challenges with regards to reporting anticipated financial impacts.
• 34:18
  SPEAKER_02: Another was around just the uncertainty with regards to regulations and the timing around regulations.
• 34:24
  SPEAKER_02: And then the third was around poor data availability and quality.
• 34:29
  SPEAKER_02: Uh so probably no surprises there for people that are familiar, they've gone through the implementation, um, particularly the first round on anticipated financial effects.
• 34:39
  SPEAKER_02: I think this has been an area that I know the ISSB has gotten feedback from when it's asked, um, you know, asked for feedback in terms of areas and they have been trying to be responsive.
• 34:50
  SPEAKER_02: They have, again, put out some white paper materials to try to help um educate the market.
• 34:55
  SPEAKER_02: But I think this continues to be a difficult area just by its nature, um, particularly for financial services companies, but probably for other industries too.
• 35:03
  SPEAKER_02: When you're thinking about um, you know, if if these are coming from downstream value chains, so it's more about your customers' kinds of exposures, is where you more have that impact.
• 35:14
  SPEAKER_02: Um, and trying to think about the timelines associated with this, this long-term, medium-term, short-term concept.
• 35:20
  SPEAKER_02: So trying to forecast out, you know, more than one year in advance of what could be potential anticipated financial effects is is, I think, inherently difficult.
• 35:29
  SPEAKER_02: Uh, but maybe I'll start with you, Tim, in terms of uh did those resonate with with your with what you've been through, or the others you would call out um as you were dealing going through implementation?
• 35:39
  SPEAKER_01: No, absolutely.
• 35:40
  SPEAKER_01: I mean, anticipated financial effects is uh clearly the the hot topic here, or or you know, the problem area to to look into.
• 35:51
  SPEAKER_01: Um so when I when I looked at this, you know, I thought of it through the lens of, as I mentioned at the start, you know, I started off my career on the accounting side as a CPA um and learned those skills in terms of you know how accounting thinks of things, the historical mindset, the deterministic approach, etc.
• 36:08
  SPEAKER_01: Um, and then I moved into a more of a risk domain.
• 36:11
  SPEAKER_01: Um and they in risk they look at things more in terms of probabilistic outcomes.
• 36:15
  SPEAKER_01: You know, you have ranges of outcomes, so it's anticipated forward-looking effects.
• 36:20
  SPEAKER_01: Um, it's much more nebulous, it's harder to sort of you know uh quantify.
• 36:24
  SPEAKER_01: And I think that's what uh you know ISSB is trying to do here.
• 36:27
  SPEAKER_01: It comes from the accounting mindset.
• 36:30
  SPEAKER_01: Um, but in in accounting, you know, you have tried to sort of incorporate and accommodate that more sort of nebulous probabilistic approach.
• 36:38
  SPEAKER_01: So um I remember, you know, there were certain rules such as IFRS 13, which is kind of the pricing of liquid assets, so level three pricing.
• 36:47
  SPEAKER_01: You know, it's it's been around for 20 years, but it's still a little bit of a bone of contention.
• 36:52
  SPEAKER_01: Um, you look at IFRS9, which is expected credit losses, and then you have overlays of environmental overlays, that kind of thing.
• 36:59
  SPEAKER_01: So, you know, you went from a world of you have to recognize a loss when it's reasonably likely to happen, to you have to have more of a forward-looking view.
• 37:08
  SPEAKER_01: And if your models don't can't incorporate that forward-looking view, then you have to have that environmental overlay.
• 37:14
  SPEAKER_01: Um, so you know, the it's it's very difficult to quantify and effectively capture this very sort of probabilistic forward-looking quantification of risk into a very deterministic approach.
• 37:27
  SPEAKER_01: Um, as I sort of thought about this more and researched this further, um, IFRS 17 also came up.
• 37:32
  SPEAKER_01: So, the insurance uh contract liabilities, where insurance businesses, their forward-looking pricing is all about what is the you know, probabilistic outcome that could happen there.
• 37:42
  SPEAKER_01: Um, and I think the feedback has been much more positive there.
• 37:46
  SPEAKER_01: But if you look at the framework and the architecture around that, you know, when I was even devoid university looking at what I wanted to do in college, actuarial science came up.
• 37:55
  SPEAKER_01: That's a, you know, an industry profession that's been around for 50, 60, 70 years.
• 38:00
  SPEAKER_01: So there's a lot of investment, there's a lot of knowledge, there's a lot of development that's gone into forward-looking insurance type pricing that tries to address this proper list of risk.
• 38:10
  SPEAKER_01: So, sustainability to bring this um full circle, sustainability is trying to um uh undertake the same approach.
• 38:18
  SPEAKER_01: And as I suggest, you know, with the illiquid pricing, with the expected credit losses, you know, there's mixed results, as I understand it, um, on how well that's gone within the accounting profession.
• 38:30
  SPEAKER_01: Maybe we should look more towards um, you know, the insurance type pricing, but are we ever really going to have that level of investment, that level of kind of quantitative modeled, model-based analysis?
• 38:42
  SPEAKER_01: It's hard to see for sustainability um today compared with what's evolved in the insurance industry, but that's directionally where it's trying to go.
• 38:50
  SPEAKER_01: So trying to quantify the anticipated financial effects, you know, that's had mixed success in different areas.
• 38:58
  SPEAKER_01: It's the right way to go to try and do it.
• 39:00
  SPEAKER_01: It's just a very big um apple to try and take a bite out of.
• 39:04
  SPEAKER_01: That's great.
• 39:05
  SPEAKER_02: I've got two reactions.
• 39:06
  SPEAKER_02: One, I loved all the IFRS references um in the podcast notes.
• 39:10
  SPEAKER_02: We'll have to give the accounting standard codification references for our US gap, but that was that was awesome.
• 39:15
  SPEAKER_02: Um, and then secondly, just I think this is um uh the classic standard setter conundrum where you have the the user community who's saying, hey, we want this information, so therefore please require them to disclose it.
• 39:31
  SPEAKER_02: And then you have the preparer saying this is really hard and we don't feel great about including these numbers.
• 39:38
  SPEAKER_02: And can we get additional relief, or can we change the requirements to try to make uh that cost-benefit analysis of the cost of going through trying to come getting this and how beneficial is that information going to be?
• 39:49
  SPEAKER_02: So I'd imagine this is gonna be one of those areas for the ISSB as a standard setter, we'll continue to get feedback on and we'll continue to see tweaks to the model as they try to find that right balance.
• 39:59
  SPEAKER_02: But Linda, any thoughts?
• 40:00
  SPEAKER_04: Yes.
• 40:01
  SPEAKER_04: So I I and I I'll also connect, I think the challenges with reporting anticipated financial impacts, along with um you know some of the survey responses around challenges, around lack of standardized definitions and and methodologies, because I I think in in addition to everything that Tim said, I think part of what is underpinning the challenges with, in particular, anticipated financial effects of material risks and opportunities is, you know, as I think back to the SEC climate disclosure rule and uh um all of the uh all of the discussion around the proposed reg S, reg Reg SX disclosures, where you know the the challenge around how do you actually how do you actually define and then kind of attribute and disaggregate the impact of climate on a basically risk or opportunity.
• 40:59
  SPEAKER_04: So, you know, are you talking about severe weather or events, or are you talking about um, you know, or or or do you have to look at to what degree is that severity due to climate change?
• 41:12
  SPEAKER_04: You know, for for example, and you absolutely see this on the um, you know, more let's say transition risks or opportunities side.
• 41:20
  SPEAKER_04: So I I think there are some of these deeper challenges around, you know, how do you even how do you even define climate-related risks and opportunities?
• 41:29
  SPEAKER_04: And it's it's different when you know you're talking about it from a a more qualitative strategic perspective versus if you're having to actually look at, okay, what does what does that look like in a you know financial statement line item?
• 41:43
  SPEAKER_04: And I I think that is it it people have maybe underestimated how challenging that shift is going to be.
• 41:52
  SPEAKER_04: And then there's the additional uh you know, again, again, challenge around our different market participants kind of interpreting this differently.
• 42:01
  SPEAKER_04: Um, your like different auditors may have different views.
• 42:05
  SPEAKER_04: How all of this, how all of this develops, it's and I said it's gonna be really challenging.
• 42:11
  SPEAKER_04: And there will be, it will take some time, you know, for um for market practice to develop.
• 42:17
  SPEAKER_04: And the ISSB has um been been doing a wonderfully engaged job of you know trying to work through some of these challenges with the market and with regulators and provide more resources and capacity building.
• 42:33
  SPEAKER_04: Uh, but I think a lot more of that's gonna be needed.
• 42:36
  SPEAKER_02: Yeah, and I echo um the efforts.
• 42:39
  SPEAKER_02: I mean, they've done a tremendous amount over the since the five years or so that they've been, and I know they can will continue uh given their agenda.
• 42:45
  SPEAKER_02: They have a very active agenda.
• 42:47
  SPEAKER_02: Uh so there were some other findings coming out of the survey.
• 42:51
  SPEAKER_02: I'm gonna use this as an opportunity to plug that we did publish this on our website uh for those that are interested in diving a little deeper into the actual responses and and some of the other themes that came out with it.
• 43:03
  SPEAKER_02: Please uh go to our website.
• 43:04
  SPEAKER_02: I'm sure we'll include a link in the podcast notes when we publish this.
• 43:08
  SPEAKER_02: Uh, but maybe what I'll just ask is if we, as we wrap up, um, would love to get your guys' take in terms of what would be one thing you would recommend to some of your peer companies or other companies that are looking to go on this ISSB implementation journey uh over the next whether it's one year, a few years, um, on a voluntary basis or or uh or because of a compliance requirement.
• 43:31
  SPEAKER_02: Um kind of what would be your your take from your own personal experiences as organizations that you would uh you'd share?
• 43:38
  SPEAKER_02: Maybe I'll start with you, Tim.
• 43:39
  SPEAKER_01: Yeah, um the easy one for me is don't underestimate uh you know how much this will take, the the sheer burden.
• 43:48
  SPEAKER_01: So as you mentioned, you know, we've um gone through this process with a few different frameworks.
• 43:54
  SPEAKER_01: So I'll speak you know more generically, but um when you're trying to do so much in in such a short Short period of time.
• 44:01
  SPEAKER_01: It's you know, with institutions like banks that are um you know traditionally quite conservative and don't move you know very fast, um, it's a it's incredibly hard to do.
• 44:12
  SPEAKER_01: Um and you know, we've gone from, I think we alluded at the start of the conversation, from the voluntary um paradigm to you know a regulatory um approach now.
• 44:21
  SPEAKER_01: So new teams exist today that didn't exist three, four years ago, ESG controllers, for example.
• 44:26
  SPEAKER_01: Um, and they're essential because we need the rigor and the experience in the reporting, but also you know, the SME experience of the sustainability team.
• 44:34
  SPEAKER_01: So it's become much more of a collaboration effort than you know, it used to be very much siloed within the sustainability team, but now it's it's a whole different approach.
• 44:43
  SPEAKER_01: Um, you know, I I came from the mainstream banking side, having worked in uh finance and risk and some business roles as well.
• 44:50
  SPEAKER_01: So I kind of kind of understood what was coming in terms of you know big firm bureaucracy and you know the red tape with regulation that you know we we all live by, um certainly since the financial crisis.
• 45:02
  SPEAKER_01: Um but for a lot of sustainability teams, you know, this is entirely new to them.
• 45:06
  SPEAKER_01: They they you know they haven't seen that in the mainstream bank.
• 45:09
  SPEAKER_01: And you know, it it's it can be very bureaucratic.
• 45:12
  SPEAKER_01: So um certainly don't underestimate uh the buy-in, the resource, the senior sponsorship you need in order to move um fences forward and to get people involved.
• 45:24
  SPEAKER_02: Linda, your closing thoughts?
• 45:25
  SPEAKER_04: Yeah, so I I think uh first off, I think the in looking at a key takeaway number seven and just the importance of having of that cross-room collaboration, whether it's um the ESG controllers, accounting policy, legal sustainability, climate risk, um, you know, the the business, all involved in uh trying to work through this.
• 45:52
  SPEAKER_04: Um and I think part of that also is going back to uh my comments earlier around TCFD Plus versus the financial materiality lens, the uh you know thinking uh thinking through kind of as that as that group across the firm, what does a materiality assessment framework look like?
• 46:12
  SPEAKER_04: Because that is where all of this flows from.
• 46:15
  SPEAKER_04: And I I think that's where we'll see a lot of differentiation across firms.
• 46:19
  SPEAKER_04: And there's there's not a great roadmap for how to do that at this point.
• 46:23
  SPEAKER_04: So don't underestimate the the work that that's going to involve.
• 46:28
  SPEAKER_04: Um, but at the same time, I think there are a lot of the you know opportunities in doing that in terms of again having all of those different parties kind of across the firm engaged and and looking at this.
• 46:41
  SPEAKER_02: Linda?
• 46:41
  SPEAKER_02: Tim?
• 46:42
  SPEAKER_02: I thought this was going to be an interesting and fun conversation, and you did not disappoint.
• 46:47
  SPEAKER_02: Thank you so much.
• 46:48
  SPEAKER_02: This has been great.
• 46:49
  SPEAKER_02: Uh, really appreciate your time.
• 46:50
  SPEAKER_04: Such a pleasure.
• 46:50
  SPEAKER_04: Thank you.
• 46:51
  SPEAKER_02: Thank you.
• 46:51
  SPEAKER_02: Thank you very much.
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