Emmanuel Faber, ISSB Chair, on why accountants hold the key to a cleaner future
Emmanuel Faber struck back at critics of greening business by becoming the first Chair of the new International Sustainability Standards Board. He tells Laurence Eastham why accountants hold the key to a cleaner future
You’ll most likely know Emmanuel Faber from his time at Danone. As CEO from 2014 and then Chairman from 2017, he turned the $37bn (£29.5bn) food and drinks behemoth into one of the most forward-looking listed companies when it came to social and environmental responsibility. He hired 200 carbon data managers, turned the company into an entreprise à mission (the French equivalent of B Corp) with 99% shareholder approval, and introduced the reporting of carbon-adjusted earnings per share (EPS).
But you will probably also know that things ended acrimoniously. In 2021, less than a year after that sweeping endorsement from shareholders, Faber was removed from his positions at Danone by activist investors who felt its performance had been trailing competitors and that the corporation needed to strike the “right balance” between shareholder and stakeholder returns.
Now, Faber has taken on a new mantle, as chair of the International Sustainability Standards Board (ISSB) for a three-year term. The board was unveiled at Cop26 by its parent organisation, the IFRS Foundation, which reorganised its internal structure to place the ISSB on a par with the International Accounting Standards Board, which has guided the direction of financial reporting standards for more than 20 years. As well as streamlining the work of the foundation, it was a symbolic move that announced to the world that sustainability is top priority for the accounting community.
“I felt that it would connect my longstanding passion for, and commitment to, sustainability with my long practice of accounting and finance,” Faber says of his new role. “I’ve been signing accounts for about 25 years as CFO and then CEO. I know how financial disclosures frame how investors make decisions – how they assess a company’s value and their own investments. By providing them with a truly reliable, comparable international standard on sustainability topics, in particular on climate, it will help drive capital allocations towards the necessary transition to a climate resilient and socially inclusive society, which many companies feel an urgency to address.
“Today, 140-plus jurisdictions are implementing IFRS standards. We expect to create a global baseline of sustainability financial disclosures that will make sure companies, investors and capital markets have the right standards to evaluate and assess value when it comes to sustainability. And jurisdictions may decide to build upon them, if they wish, for example to require disclosures linked to specific policy goals.”
So, there’s a lot of work to be done as the first-ever chair of a brand-new organisation, tackling one of the most pressing topics in the world today. But Faber and the ISSB have leapt into action. The Value Reporting Foundation, comprising the Integrated Reporting Framework and Sustainability Accounting Standards Board, and the Climate Disclosure Standards Board will all be fully consolidated into the ISSB by this summer. And consultations on draft climate and sustainability standards will close at the end of July, with the expectation that they will be ready for adoption by the end of the year.
“Our real focus at this stage is that our global requirements stand as one, embracing the Taskforce on Climate-Related Financial Disclosures as a framework as part of that,” says Faber, drawing on the landmark publication of the first international accounting standard, IAS 1, in 1975 as a parallel. “Plus, the first of our thematic and industry-based standards on climate should be ready for adoption around the end of 2022. During the second half of this year, we will consult on our agenda, which will follow the consultations conducted by the IFRS trustees in 2020 and 2021, as it is clear we need to develop further standards beyond climate.
“In three years, my ambition is that we have a climate standard which has been widely enough adopted that we can start seeing market pricing being impacted by the issuance of disclosures year after year. So, we can see sustainability standards are changing capital allocation, which is fundamentally our ambition.”
Faber emphasises the importance of having one global baseline of reporting standards, breaking through the noise of what he describes as an “alphabet soup” of acronyms. For both preparers and users of financial information, the litany of sustainability metrics and frameworks in the market can feel impossible to navigate. And the knock-on effect of ambiguity and inaction is poor decision-making, and outcomes, when it comes to the environment and climate.
“No one really understands how good the soup is, what the ingredients are, and whether what’s on the package is true or not,” says Faber. “Many refer to that as greenwashing – I certainly do. And greenwashing is the worst thing that can happen right now, because it basically encourages people not to be accountable. You choose the standard that best fits your current short-term communication needs. So, there’s a huge amount of cynicism, which kills the ability of people to go into these questions of sustainability as a strategic topic for the company, because nobody can differentiate what is true and what isn’t.
“In the food sector, we know that if we continue to extract carbon from soil using intensive agriculture, it will not be able to grow food in the next 15-20 years. If we had a truly comparable, assurable baseline of disclosures, the whole industry would behave differently today, in terms of putting the right amount of focus and capex into regenerative agriculture. Some are doing it, but only in a limited and marginal scale, because they cannot prove the business case to their investors in a convincing manner.”
And that’s where accounting and finance professionals, and the magic of business, come in. Faber sees an important custodial role for government, using taxes and subsidies to shift market incentives around sustainability, but he expects the “heavy lifting” to come from the private sector. But there is an uphill climb when it comes to the public reputation of finance, and its ability to bring about change.
“In many ways, at least in terms of public opinion, finance is the missing link,” says Faber. “Unfortunately, there is really quite broad consensus that finance has failed. It is seen as the enemy because of the short-termism of the quarterly reporting EPS that so many are focused on. But, personally, I think that finance is a gift to humanity – if finance does what it needs to do by allocating capital resources to where they’re most needed and in the most efficient manner.”
Sorting out that alphabet soup will hit two birds with one stone: enabling investors and businesses to make more climate-friendly choices and improving the reputation of the finance sector in the process. By demonstrating a commitment to sustainability in this way, Faber expects trust in finance and accountancy to improve. And the effects will snowball over time, attracting more and more purpose-driven professionals to work in the industry.
“The fact that this is coming from within the core of the accounting profession, with the IFRS Foundation, is great because it is reinvention from the inside,” he says of the ISSB. “It speaks to the growing leadership of this finance generation. In my previous company, when we established carbon data managers, we attracted the best finance people because they were passionate about linking their expertise with the sustainability of the business. Finance people realise this is about writing the next generation of accounting in many ways.”
That chairing the nascent ISSB was Faber’s first post-Danone move speaks to his conviction that accounting holds the key to making business, and with it the global economy, more sustainable. The profession’s engagement will be critical to making it a success. Faber encourages all accountants to share their feedback with the board as it begins rolling out its first standards in 2022 and beyond.
“We will not be successful without the accounting community,” he explains. “We need the profession to be really active in commenting on our exposure drafts. In the coming months, you’ll have SEC [Securities and Exchange Commission], EFRAG [European Financial Reporting Advisory Group] and ISSB consultations running in parallel. I truly expect and hope for strong engagement from chartered accountants all around the world. We need your input to make sure you feel comfortable in educating, training and pushing for the adoption of these standards with your customers and clients.”