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Emmanuel Faber, Chair of the International Sustainability Standards Board (ISSB), spoke at the IFRS Foundation Conference on Monday 26 June 2023 to officially launch the inaugural global ISSB Standards, IFRS S1 and IFRS S2. 


Sustainability translated into an accounting language, a new common language to build more resilient economics

98 years ago today, on 26 June 1925, Charlie Chaplin’s film Gold Rush was released.

That movie poetically epitomises the limitations of the ruthless economics of Klondike during the rush for gold. Ruthless from an economic, social, human and environmental standpoint.

In many ways these were the economics of the early start of the last century. Since then, the market economy developed and through its painful, Schumpeterian "creative destruction process" successfully brought technological changes and progress that lifted billions of humans out of poverty.

The last frontier in this progress was crossed thirty years ago, when Southeast Asian tiger economies1 started to grow much faster, following similar patterns of Japan before it, as well as China from 1991 onwards. The same happened from 1989 in Europe, with the opening of the eastern European block.

Today, as a result, global capital markets are an economic reality.

In response to this opening up of local capital markets there was a desire—originating in the office of Paul Volcker in the 90’s—to protect US investors from the lack of developed and robust-enough accounting standards in these emerging areas in Southeast Asia.

This led to the creation of what today is the IFRS Foundation. A truly international financial reporting system that has played a huge role in allowing this last frontier to be crossed.

This financial reporting system has enabled capital to flow through emerging countries including gradually into Africa, and prove the economist Hernando de Soto wrong, or so it seemed, who in the year 2000 published his famous book ‘The Mystery of capital: Why capitalism triumphs in the west and fails everywhere else’.

And yet, I'm standing with you here today, very conscious that we are now at an even more challenging frontier for capital markets and for the future of accounting.

Why and how could we think otherwise if you think of the many ESG frameworks that have flourished over the last decade—or go back even further with initiatives such as GRI, which started over 25 years ago and is truly global today—to try to find a solution to express between companies, investors, but also other stakeholders, notions that neither economics nor accounting capture.

Why did these people spend all that energy, effort, talent, and money to develop these metrics if economics were doing what they needed to do?

Simply because they didn’t.

With the linear growth that economics drove for the last 100 years, when there was ample headroom to grow, from yet another lower class in a new country—elevated through the creative destruction process—to middle class, we felt that we knew what tomorrow would be. We felt that we had the magic equation that would solve humankind’s problems.

And in many ways we did, but we are reaching its limits. We are reaching the boundaries where uncertainty is growing and is hitting the market, hitting financial stability—the systemic stability—of markets. Because we did not count all that counts and which ESG tries to capture.

And what is true for macro levels, is true at the very micro level for companies. We learned that large, complex organisations meant a lot more than what financial statements could communicate to shareholders and bankers.

Take a simple example: economics do not recognise nature.

The price we pay and what we account for in the financial statements is not what it took for nature to create oil. What we pay for—what we account for—is the cost of exploring, of producing, transforming, distributing, and selling that oil in the gas stations. But not a single penny is paid for the 55 million years of work by nature to make it fossil.

We know they are fossils; we know we won't be able to replace them, and one day, maybe in 10 years, maybe in 100 years that will come to an end.

We scarcely, barely, pay the price of water. Yes, we pay a price for water as businesses, but the real value of water, we don't pay.

I am based in Frankfurt, not far from the river Rhine. Last July we had a heat wave. The water level of the Rhine went down by 80% in some places, meaning navigation had to be stopped.

Barges couldn't travel one of the largest rivers in Europe, flowing through six countries for over 1,000 kilometres, and one of the busiest. Supply chains were disrupted for three weeks, even six months later there were consequences to those supply chain issues.  

About the same time, the French nuclear power plant system had to be shut down on the Rhône river because the river’s temperature had reached its limit, meaning legally it could not be used to cool down the nuclear power reactors. The energy production of France was reduced by around 10%.

These two events were a result of just six weeks of heat waves.

I ran a company that was the largest almond user in North America. These almonds were grown in California, for which a lot of water was needed. We paid for that water, but we never paid the value that it may have the day there isn't enough water for everyone in California.

And we never paid for something that is irreplaceable: pollination by bees. Bee populations are decreasing fast in California. And we do not have a replacement solution.

So, it's quite clear that regenerative agriculture, that investing in the true value of nature and how to protect these ecosystems that are essential for our economic lives, for our ways of life as human beings, is critical for economics to allow.

The Chair of the board of the largest insurance company in the world ten years ago, in 2015, said “a world at +4 degrees cannot be insured.” You are all well placed, in this room, to know that insurance is fundamental to how businesses work, to how economics work, fundamental simply to our ways of life.

That was in 2015. One month ago, I was in San Francisco when the first and the fourth largest Californian insurance companies announced that they would stop issuing any new home insurance package, as they could not afford in the future the cost of dealing with the extreme weather events, including floods and fires in California.

I'm not talking here about 2050. I'm not talking here about a small emerging country.

I'm talking about May 2023. I'm talking about California, which many predict will become the fourth largest economy in the world, passing Germany soon.

Without home insurance. Really?

This is what economics are failing to take into account. And we cannot apply a damage function to an asset that doesn't have a value. We cannot value something that is not considered an asset.

This is why, over the last several years, IOSCO, the Financial Stability Board, the G20 and the G7 business leaders have gradually looked to the IFRS Foundation and urged the IFRS Foundation to work on this, because this is the only organisation that has the IASB.

That indeed developed an accounting system that is based on a robust, informed due process, answering the market needs for the public good of capital markets around the world. That for two decades have been in place in more than 140 jurisdictions.

Who could have been better placed to do this?

This is what we were tasked with doing, standing on the shoulders and building on the work of many people, organisations that were before us: TCFD, SASB, the International Integrated Reporting Council, CDSB, to bring forward a language, an accounting-based language.

Not a discreet suite of ESG metrics and disclosures which could be inconsistent, which could be competitive against each other, with redundant overlap and with gaps.

A consistent and comprehensive language.

This morning we were standing on one side of that frontier, and now, we cross it.

We cross it with the launch of IFRS Sustainability 1, already known as S1, our general requirements standard, and IFRS Sustainability 2 (S2), our climate standard.

I will not go into the details of the Standards, but I'd like to briefly share with you why I'm talking about a language here.

We borrowed significantly from our IASB sister board’s work in the substance of what, over decades, they have developed. Our language is an accounting language. It is sustainability translated into an accounting language.

You will find in IFRS S1 notions that you are very familiar with because we want as much as possible that connection to the financial statements. We are here to support the needs of the primary users of general-purpose financial reports - bankers, investors and others - in the decision that they take on providing resources to companies.

We're broadening the horizons of the financial statements. We're broadening it in scope by going into the entire value chains of companies, because this is where most of the sustainability risks and opportunities are found. I spoke about climate and nature, but it's true for social capital, for human capital and many others which are all found in value chains.

We need to apply this language to a broader scope than what is required for the very strict and important limitations of recognition in financial statements.

We are also opening another important horizon, a time horizon. We are formally requiring companies to report in this whole value chain perspective on the short, medium, and long-term horizons.

And we are connecting the dots with economics and with the financial statements in two ways.

The first is very early in IFRS S1, just after the first paragraph about its objective, where you will find a description of what we see as sustainability.

It affirms that the value that a company creates for itself, or its shareholders, is inextricably linked to its business ecosystem, the civil society in which it operates, the human capital that it employs, the natural resources that it has to use and deploy.

Therefore, to be able to manage the company in the long term and reach its objective over time it's useful for companies to consider, when engaging with their shareholders, how they're managing those relationships and dependencies with natural capital, with social capital, with human capital, and their impacts on them.

Not only describing these relationships and these dependencies, but also these impacts that they may have, as some of them may be material to investment decisions. And so thinking about the development, the protection, the regeneration of those capitals.

Values in these capitals are not in silos, the same value travels from one to the other.

If I underinvest in regenerative agriculture, my soil will be degraded and in the short term I'll be able to capture value that may travel to dividends to my shareholders. But if I only focus on that, I won’t have dividends 10 years from now, because I won't have agriculture anymore, because soils will be dead.

So, there may be an important trade-off to go from efficiency to resilience and to think about investing in regenerating agriculture to continue to build this inventory of value that is sitting there in the soil and that I want to protect for the longer-term so that I can continue to provide dividends to shareholders.

These are the questions that so many CEOs and CFOs today are considering, and they needed a language. We are providing this language thanks to concepts we’ve taken from the Integrated Reporting Framework.

The second important connection with value creation lies in the requirement for disclosure of the current and anticipated effects of those sustainability-related risks and opportunities on the financial statements.

Let me pause here.

These concepts have been developed with unique, market-informed due process including public redeliberation.

Furthermore, we benefited from the input and advice of a Jurisdictional Working Group made up of a number of jurisdictions actively engaged in standard setting in the areas of sustainability.

We engage regularly with IOSCO and the Financial Stability Board, and we confidently await the result of the very thorough due process that IOSCO is undergoing to consider endorsement of our Standards. This would be another game changing milestone in the ability of markets to benefit from the work that we have started here.

I will conclude in saying that this is just the start. We've just crossed that frontier thanks to a huge collective effort.

I encourage you to dare, yourselves, to learn to speak this new common language immediately.

We know there will be a learning curve. We are very clear that capacity building will be front and centre of our work for the next several months and probably several years, working with everyone in this room and beyond to ensure that this language is used effectively. And that everyone crosses the frontier and starts this critical journey together.

On 26 June 2025—two years from now—when the first reports of companies disclosing to IFRS S1 and IFRS S2 start coming out following the 2024 effective date, will be the 100th anniversary of Charlie Chaplin’s Gold Rush. He always insisted that this was the film he most wanted to be remembered for; Well, I hope by that date we can say, once and for all, we have departed from these past economics , in a collective journey towards better informed and resilient capital markets, towards more resilient economics, serving people and life better.

I count on you.

Thank you.


1. South Korea, Taiwan, Hong Kong and Singapore