Erkki Liikanen, Chair of the IFRS Foundation Trustees, delivered his speech at the welcome reception for the European Accounting Association Conference in Dipoli, Finland, on 24 May 2023.
Good evening everyone. I am happy to see you all here in Finland and in this wonderful Dipoli, which was built for the students at the University of Technology at their own initiative. Reima Pietilä, a famous Finnish architect, said modestly that ‘it does not represent good taste, but defends its right to be different but still architecture’.
People of my generation have many memories in this building. As young students, we launched here a major campaign for the liberation of Southern African colonies. In the autumn of 1972, a very large European Youth Security Conference was organised here. For a 21-year-old member of Finnish parliament, it was very special to give the opening speech here then.
And now to global accounting standards.
I am happy to welcome you as the Chair of the IFRS Foundation Trustees. Before that, I spent many years in central banking. Two decades beforehand, Paul Volcker held this role after his world-famous career in central banking.
Paul Volcker was a visionary. As the chair of the Federal Reserve, he rescued the American economy from rampant inflation. In our world, he also served as the inaugural Chair of the IFRS Foundation Trustees.
Not only did he guide the formation of the Foundation and the International Accounting Standards Board (IASB) in 2001, following on from IOSCO’s endorsement of IFRS Accounting Standards, he also travelled around the world encouraging their adoption. I met him in early 2000 during his trip to Brussels.
Paul Volcker addressed the European parliament, arguing that Europe should embrace the fledgling IFRS Accounting Standards. He also addressed the US Congress following the failure of Enron and WorldCom, arguing that US accounting was in a state of crisis. Paul Volcker, with many others, including members of your organisation, laid the groundwork for IFRS Accounting to become the de facto global language of financial reporting. It is spoken as a first language in more than 140 countries and as a second language by the rest of the world.
Companies, investors, regulators, auditors and academics all benefit from this global lingua franca. It’s a great story—a story we sometimes forget to tell. In a world of so many geopolitical divisions and tensions, it is more and more appreciated.
Today, I pay tribute to Paul Volcker also for his work to improve banking structures. In 2014, the managing director of the IMF, Christine Lagarde, invited him and me to participate in a panel in Washington. The theme was ‘how to make the banks safer’. It is again topical.
Climate and other sustainability issues are today high on many agendas.
Financial statements are key, but investors are interested in a broader set of information. Climate especially, but sustainability information in general, is on the top of the list.
Identifying winning and losing business models requires a more thorough understanding of risks and opportunities over the short, medium and long term.
To tackle the carbon transition, we need policy measures and private capital, and to get private capital, we need better disclosure.
Patrick Bolton and Marcin Kacperczyk produced a study that found that voluntary emission disclosures lead to a significant reduction in the cost of equity capital. They suggest that there is room for more disclosures by more firms.
With more systematic disclosure, asset managers will be in a better position to manage the carbon footprint of their portfolios. Banks will be better able to assess their exposure to carbon transition risk. And carbon data providers will be able to estimate more accurately the direct carbon emissions of non-disclosing firms. They can also estimate indirect emissions firms are exposed to in the supply chain or are generating through the use of their products.
So, climate and broader sustainability factors matter to the capital markets—but there were no internationally accepted sustainability disclosure standards for the capital markets. No IFRS equivalent for sustainability, but instead an alphabet soup of voluntary standards.
The G20, G7, the Financial Stability Board, IOSCO and others have been vocal about demand for sustainability disclosures. In 2020, the IFRS Foundation Trustees sought replies to two key questions: Was there demand for global standards? If so, should the IFRS Foundation play a role, and how? The overwhelming feedback was positive.
In November 2021, we launched the International Sustainability Standards Board (ISSB) at COP26 in Glasgow. Its mission is to develop, in the public interest, a global baseline of sustainability disclosures for the capital markets. We announced the consolidation of the Value Reporting Foundation and the Climate Disclosure Standards Board, and we published prototype requirements that build on established frameworks, such as TCFD.
It has been an intensive 18 months since COP26. Early on, our priority was to establish the leadership and appointment board and build its presence globally.
The ISSB consulted on draft Standards for general sustainability disclosures and a climate Standard, then set about refining its proposals based on feedback received. The plan is to publish these inaugural Standards soon, at the end of June.
Earlier in May, the ISSB began a consultation on future priorities.
Preparations are underway around the world to consider whether and how to adopt the new Standards. IOSCO will conduct its evaluation before deciding whether to recommend their use. We’re working with major jurisdictions through our Jurisdiction Working Group, as well as on a bilateral basis. For example, we have very good co-operation with the European Commission and EFRAG. And we continue to work well with our international peers, such as the Global Reporting Initiative.
None of this would be possible without the deep involvement of the academic community.
The European Accounting Association has been with us at every step of the way. As you celebrate your 45th annual congress, we celebrate your central role in our work. Our success is your success—intially for global accounting standards, and more recently for global sustainability disclosures.
We value academic research for its independence and rigour. We continually look for high-quality evidence that can assist in making standard-setting decisions. We have always had academics on the standard-setting boards, among the IFRS Foundation Trustees and on our advisory bodies, such as the Advisory Council.
We are grateful for the support you are providing through various workshops and consultations throughout the year, especially the IASB Research Forum for academics, which is being held this year in Paris from 2–4 November 2023.
The ISSB is also developing its relationships with academics through a range of conferences and other activities. There are long-established relationships with academics through the Value Reporting Foundation and its consolidated organisations, the International Integrated Reporting Council and the SASB.
All of these developments indicate strong and effective relationships between the IFRS Foundation, our standard-setting boards and the academic community around the world. Standard-setting has always been rooted in academic rigour, and always will be. We are highly receptive to further deepening our co-operation, and I look forward to continuing our discussions over drinks.
Thank you for your attention.