Comments on the Exposure Draft on Proposed Targeted Amendments to the IFRS Foundation Constitution to Accommodate an International Sustainability Standards Board to Set IFRS Sustainability Standards (2021-07-21)

July 21, 2021
Global Strategy Task Force on ESG Disclosure
Committee on Financial and Capital Markets
Keidanren (Japan Business Federation)

To: IFRS Foundation

Keidanren welcomes the opportunity to comment on the Exposure Draft on Proposed Targeted Amendments to the IFRS Foundation Constitution to Accommodate an International Sustainability Standards Board to Set IFRS Sustainability Standards (hereinafter "Proposed Amendments to the IFRS Foundation Constitution").

(General Remarks)

Since the establishment of the IFRS Foundation, we have always supported its activities. Through personnel and financial support, submission of our opinions to the International Accounting Standards Board (IASB), and other means, we have contributed to the development of the International Financial Reporting Standards (IFRS) toward the realization of a single set of high-quality global standards as well as to their dissemination in Japan.

As stated in our last year's Comments on the Consultation Paper on Sustainability Reporting by the IFRS Foundation (2020-12-18), we respect and support the IFRS Foundation's initiative to develop global sustainability reporting standards. Once an International Sustainability Standards Board (ISSB) is established under fair and transparent processes and sets off to develop global sustainability reporting standards, we are ready to contribute to the endeavor in various forms and ways.

We support the strategic direction presented by the IFRS Foundation, which we find is consistent with what we stated in our comments on the consultation paper. Particularly, we find it reasonable that in its standard-setting efforts, the ISSB should focus on information which is material to the decisions of investors (single materiality), prioritize the development of climate-related reporting standards, and build on the existing frameworks and work such as the work of the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD).

The "Proposed Amendments to the IFRS Foundation Constitution" reflect the strategic direction and we find them generally reasonable. On the other hand, we believe that the development of sustainability reporting standards by the ISSB should be carried out as a public interest activity, maintaining neutrality free from political and commercial pressure, as is the case for the activities of the IASB. To that end, it is essential that 1) selection of the ISSB members, 2) development of standards, and 3) fundraising will be done using fair and transparent criteria and processes. It should be kept in mind that if the IFRS Foundation ends up contradicting the existing rules of its Constitution or disregarding the fairness and transparency of its processes by rushing to establish the ISSB and make it start working on the development of standards, not only the credibility of the ISSB's standard-setting efforts in the future but also the credibility of the IFRS Foundation and the IASB that has been built over the years would be undermined.

Based on (General Remarks), we make the following requests:

(Specific requests)

1. ISSB members

To enable the ISSB to develop standards in a way conducive to the public interest, it is essential to reflect views of various countries and regions in a well-balanced manner without bias in favor of the interests of any specific country, region, or stakeholder.
In this regard, the "Proposed Amendments to the IFRS Foundation Constitution" call for creating a greater number of "at-large" seats for the ISSB while reducing the number of seats representing each region by one, as compared to those for IASB. We believe that geographical balance among the ISSB members, including those in the at-large seats, should be equivalent to that of the IASB to reflect views of various countries and regions in a well-balanced manner. Even in the case the seat allocation remains as proposed in the current "Proposed Amendments to the IFRS Foundation Constitution", consideration should be given to ensure that those four members appointed to the at-large seats will not disproportionately represent any specific geographic region, and we request that a provision to this effect be included in the Constitution.
Section 43 of the "Proposed Amendments to the IFRS Foundation Constitution" states that the "work of the ISSB shall not be invalidated by its failure at any time to have a full complement of members." However, given the importance of the standard-setting process, we believe that the ISSB should be required in principle to have a full complement of 14 members, or at least, to ensure that it has more than a certain number of members and a well-balanced geographical representation.
The "Proposed Amendments to the IFRS Foundation Constitution" limit the number of part-time members to a "minority of ISSB members." However, to enable the ISSB to appoint highly competent individuals from diverse backgrounds as its members for the development of high-quality sustainability reporting standards, we believe that the number of part-time members should not be limited too strictly. For instance, while part-time members should be required to ensure a level of independence, consideration should be given in recruiting them to allow flexibility depending on the needs of applicants, rather than limiting their number to very few.
On top of the foregoing, we call for ensuring the fairness and transparency of the process for selecting ISSB members to secure the credibility of the ISSB.

2. Due process for standard-setting

To enable the ISSB to secure the trust of many stakeholders for its standard-setting activities, it is essential to build and operate a fair and transparent standard-setting process.
According to the "Proposed Amendments to the IFRS Foundation Constitution", the voting requirement for the ISSB's approval is a simple majority, whereas stricter requirements are set for the IASB as follows: "The publication of an Exposure Draft, or an IFRS accounting standard ... shall require approval by eight members of the IASB, if there are 13 members or fewer, or by nine members if there are 14 members." We believe that the ISSB's voting requirements should be equivalent to those of the IASB because having approval from a considerable number of ISSB members is indispensable to ensuring the credibility of standard-setting activities.
Section 54 of the "Proposed Amendments to the IFRS Foundation Constitution" says that in the process of establishing the ISSB, a proposed work plan for the ISSB may be published with approval of the Chair and the Vice-Chair of the ISSB. Such publication should be treated as an exception and kept to the minimum, and the general rule should be for decisions to be made by a geographically balanced board.

3. Funding

Ensuring the fairness and transparency of funding is indispensable to enabling the ISSB to maintain neutrality, free from political and commercial pressure and to develop standards conducive to the public interest.
In this regard, excessive reliance on specific countries or institutions for funding that could affect, or call into question, the independence of the ISSB should be strictly avoided. Accordingly, we believe that objective criteria for funding, such as pro-rata shares based on GDP, should be established and contributions should be sought from each country based on the criteria as is the case with the current funding arrangement of the IFRS Foundation.
In addition, the IFRS Foundation should ensure separate management of funding for the IASB and that for the ISSB to enable them to pursue their respective activities without hindering each other. Particularly, in executing budgets, the IASB and the ISSB should be treated as separate segments and uses of funds should be clearly accounted for on a segment-by-segment basis in financial reporting.

4. Other

The Accounting Standards Advisory Forum (ASAF), a forum for hearing opinions of national standard setters to provide advice to the IASB, has been functioning effectively as a mechanism for ensuring that national circumstances are taken into consideration in the development of the IFRS. Likewise, in developing sustainability reporting standards, we believe that consideration should be given to the circumstances of each country or jurisdiction. Thus, we request the IFRS Foundation to consider establishing an advisory body akin to the ASAF comprising national and regional representatives.