The ISSB can make Chief Sustainability Officers more relevant or less relevant. They Have to Choose.

My friend Bhakti Mirchandani has written about the historical significance of the creation of the International Sustainability Standards Board (ISSB). She is absolutely right about this. Sustainability is going mainstream in the corporate and investment communities, and the ISSB will help to further accelerate this. It will give us the same high-quality standards for measuring and reporting on sustainability performance that we have for financial performance. Along with this will go much higher-quality internal control and measurement systems and, ultimately, the same degree of internal and external audit rigor that goes into the financial statements. Finally, financial and sustainability reporting will be on par in terms of quality and relevance. This will enable true integrated reporting. Companies and investors will be able to rigorously understand how sustainability performance and financial performance contribute to each other. There are still those locked into an ideology that sustainability = philanthropy, despite the growing body of empirical evidence that a focus on a company's material ESG issues contributes to financial performance.

All good news, right? Ironically, maybe not for Chief Sustainability Officers (CSOs), by whatever name, who fail to appreciate how much the ISSB is going to change their lives. Ironically, the ISSB could make the role of CSO less relevant. And, let’s be honest, while most companies proclaim their deep commitment to sustainability, the role of the CSO is often a marginal one when it comes to resources, seat at the executive table, and influence on strategic and capital allocation decisions. The ISSB could make the situation worse. Or it could make it much better. It all depends on how a CSO decides to handle this, and his or her relationship with the CFO.



I will explain this more, but first let me put this in some historical perspective. I think it’s fair to say that I am one of the earliest enthusiasts for an International Sustainability Standards Board (ISSB), going back 30 years. I started working in the domain of sustainability reporting, without knowing it by name 30 years ago. Long before it was fashionable. It was a marginal, erratic, fringe activity until the Global Reporting Initiative (GRI) came along in 1997 and started to put intellectual credibility and structure to the concept.

More acronyms came along, and subsequent years have seen the formation of CDP (2000), the Climate Disclosure Standards Board (CDSB-2007), the International Integrated Reporting Council (IIRC-2010; I was one of the founders), the Sustainability Accounting Standards Board (SASB-2011; I was the Founding Chairman), and the Task Force on Climate-related Financial Disclosures (TCFD-2015). The IFRS Foundation, much to my happy surprise, issued its consultation for the ISSB in September of 2020, just two years after my Oxford colleague Richard Barker and I published our Green Paper “Should FASB and IASB be responsible for setting standards for nonfinancial information?” This paper was the basis of a heated debate at the Oxford Union. While the “Ayes” supporting mandated corporate sustainability reporting carried the day about two-to-one, it was far from a unanimous vote.

During these past three decades, we had two conversations going on. One was between the CEO, CFO, and Head of Investor Relations with shareholders. These conversations were all about financial performance and financial materiality defined in a narrow sense. The other was between the CSO and the company’s stakeholders, where materiality was defined in broader terms that typically included both “single materiality” (what matters to investors) and “double materiality” (what matters to stakeholders in terms of making the world a better or worse place). While this distinction is still relevant, and the ISSB is focused on single materiality, the line is a blurry one and can change quickly through dynamic materiality.

Over a very short period of time, the IIRC and SASB merged to form the Value Reporting Foundation, which is being consolidated into the ISSB. It was recently announced that the same will happen with CDSB, and the TCFD framework will also inform the work of the ISSB. A Chair (Emmanuel Faber), Vice Chair (Sue Lloyd), and Special Advisor to the Chair (Janine Guillot) have been named. Soon the ISSB will issue its exposure drafts for climate and sustainability reporting in general. Sustainability reporting will move from the land of NGOs and done so on a voluntary basis to the land of securities regulators and done on a mandated basis.

Investors are eager for this to happen, because they will finally have the high quality and comparable information they need on a company’s sustainability performance. And who will they talk to about this? The same people they’ve been talking to before — the CEO, CFO, and Head of IR. Of course, this will raise challenges for those used to talking to investors. They will have to learn to talk sustainability performance and show its relevance to financial performance. This will not be easy. Sustainability is a complex domain covering a broad range of environmental and social issues, and it doesn’t have (yet) anything like the underlying framework of double-entry bookkeeping. But this can be learned. And these people have the advantage of already having credibility with the investment community. They also have a big incentive to become bilingual. The portfolio managers who make the buy and sell decisions are learning how to integrate material sustainability factors into their investment decisions.

I can envision the ironic scenario where the CSO becomes more fringe as sustainability continues its move into the mainstream of corporate and investor decisions. The way things stand now in most companies, the CSO will not be part of the conversation. Sure, he or she will continue to engage with stakeholders and report on double materiality issues, but the center of gravity of the sustainability conversation will shift to the increasingly bilingual finance folks.

It doesn’t have to be that way. So, what is a CSO to do? The answer is a simple one. Learn to talk financial performance and show how it is related to sustainability performance. It’s no harder to learn finance than sustainability. It’s probably easier. Think hard about the cause-and-effect relationships between different factors of sustainability performance and different factors of financial performance. Think hard about the relevant time frames. Think hard about how to work with the CFO to implement integrated thinking in the company so that integrated reporting contributes to internal decision making, rather than being the after-the-fact ornament it is in most cases.

One last thought. There has been an ongoing debate about who the CSO should report to. Obviously, there’s no single right answer to this. I do think there are wrong answers, like marketing, PR, and public policy. Sure, it’s always good to report to the CEO. Everyone wants to.

But my vote is for the CSO to report to the CFO. There are two good reasons for doing so. The first is that it will facilitate mutual bilingual learning. The second is that CFOs know all about standards and the rigorous internal control and measurement systems for implementing these standards and reporting on them. Sustainability reporting needs a big upgrade here, and the ISSB will make this possible.

CSOs are at a juncture. They can stay in the world they’re comfortable with. They’ll still be respected, but their voice will be less. Or they can stretch themselves and become more of the conversation with the stakeholder called shareholders. The choice is theirs.

Photo: TJBauman

About the Author:

Robert G. Eccles, PhD
Visiting Professor of Management Practice, Said Business School, University of Oxford