IFSR drops “enterprise value”
The International Sustainability Standards Board (ISSB) published a recent update that nearly had me falling off my chair. New global sustainability standards had been due to focus on topics "to assess enterprise value". Following feedback, this objective sounds like it's being ditched. The meaning will be "redeliberated" they say.
Does this mean ISSB is embracing the famous double materiality, where wider impacts on people and planet are in scope? Not so fast.
Many people had been saying that the key difference between this global baseline for capital markets and the EU's upcoming regulations was materiality. Materiality is about deciding which topics matter to disclose. The EU has been explicit that companies will need to disclose not just financially material topics (which investors need), but also areas where companies have a big impact ON the world. That means topics like human rights or gender might be in scope irrespective of the financial case (double materiality).
But the ISSB isn't changing tact. As the update makes clear, the focus remains on meeting the needs of the "primary users of general purpose financial reporting" - i.e. investors and other capital market participants.
What's happened is that the feedback (1,300 comment letters in total) highlighted how tricky enterprise value is to define. The original definition focused on "‘the sum of the value of the entity’s equity ... and the value of the entity’s net debt". That's accountant speak - but is basically highly specific to valuation of a single entity at a point in time.
Many stakeholders giving feedback (including investors) pointed out that financial resilience and long term value creation is much broader. Forward-thinking investors are also increasingly interested in systemic risks: judging a single entity's value isn't enough. It's the wider picture that matters.
Materiality is a fiendishly complex area in sustainability. The key point is that the topics overlap and they change over time. It's not clear cut. Investors and other users often have different perspectives and needs. Perhaps that's why the ISSB has committed to taking its time to review this definition. Any standard needs a really tight definition of who it's for and what it aims to do. It's certainly one area to watch with interest.