Anna [00:00:02] If there's one ESG initiative that investors need to pay attention to, it's the ISSB. But before you're tempted to tune out to yet another acronym in the space that we all know is pretty cluttered with them, let me explain. The ISSB stands for the International Sustainability Standards Board, and according to State Street Global Head of ESG, Rick Lacaille, it was designed explicitly with investors in mind. Now it's getting traction and not just with ESG specialists either, but with mainstream institutional investors. I'm Anna Bernasek Head of Thought Leadership at State Street, and I'm joined today by Rick Lacaille for a discussion about what the ISSB is and why it matters. Welcome, Rick. It's really good to be talking to you.

Rick [00:00:56] Thanks very much, great intro as well, I think everyone should understand the importance of the ISSB and why it's of interest to a wider range and just in a sense, the ESG crowd.

Anna [00:01:06] Great, well, I know that you're a member of ISSB's Institutional Investor Advisory Group, so can you just sort of start by telling us about what that group does and who's involved?

Rick [00:01:20] Yes, well, the very existence of the group suggests something also about the ISSB. It is an advisory group and it's an advisory group consisting of investors. And the reason it exists is that the ISSB is committed to ensuring that much like accounting standards, the standards serves the purpose of investors. So investor input is organized very well and listened to, and I think that's really important as a reassurance for those who are confronted with the alphabet soup of different initiatives and so on in ESG but this one really is focused on investor needs.

Anna [00:02:01] Rick, can you just explain the advisory group a little in terms of like who's on it? Like you're obviously on it, but who else is there? How many members are there about roughly?

Rick [00:02:12] It's several tens of members, but it's not hundreds. So obviously you've got to reach a consensus. So it's important you don't overwhelm the system. They are familiar institutional asset owners and asset managers; typically they are stewards of the capital, often on behalf of beneficiaries, who might be pensioners or private individuals or endowments. They are typically seasoned investment professionals who have knowledge of sustainability. They may be sustainability specialists, but first and foremost they're investors and they're a very wide-ranging group, wide ranging in two dimensions. One is the type so that some are asset managers, some are asset owners, but also geographically and that's very important. And in fact, when ISSB was established, it very quickly sent a signal that it wanted to have a locus not in one place, but in Asia, in North America and in Europe. And I think that's reflected also in the advisory group that's really quite diverse in every sense of the word and in ways that are relevant to its job, which is it really needs to gain a consensus of what's important to investors globally.

Anna [00:03:28] So I do want to get into the ISSB agenda more broadly and why it was established. But I first want to just sort of ask you the advisory groups sort of meets regularly, and have you noticed anything over the past few months about the direction that the group has been going in?

Rick [00:03:46] There's certainly a strong sense of urgency in the group because there is quite rightly pressure for the ISSB to publish its proposals. I mean, consulting with a wide range of people but steered to some degree by the advisory group. So I would say the trend in terms of me I've attended is a very strong sense of urgency that we need to focus and get the job done well but quickly and climate being the paramount initial consideration, you know, there are many issues that the advisory group will develop opinions on. For example, climate is an important issue. We know exactly what sort of information we want disclosed from corporates that will allow us to make good investment decisions and manage physical and transition risk, but also other considerations as well. We'll move on to other topic areas, but the materiality is really first and foremost for most of those investors.

Anna [00:04:47] Rick, when you say get the job done that really brings us to ISSB's agenda, can you explain exactly what that is?

Rick [00:04:57] In a nutshell, the ISSB wants to ensure that corporate issuers have a very clear steer of what their investors or other capital providers want in terms of disclosure, sustainability-related material that's very important because corporate issuers are subject to a lot of demands from different private groups who ask them for information. Investors are asking them directly obviously as well as policymakers and regulators encouraging them. The ISSB wants to really concentrate that down into a set of disclosures, metrics, typically quantitative metrics that are financially material for investors and potentially fine tuned to the particular industry that the issuer is in, in other words, if you're running a chemicals business, you may be to disclose different things from if you're in an employment agency or an IT software services business. So it's very important that the investor advisory group and the ISSB take into consideration those things when they're setting out their agenda. But this has the potential to combat what has been a somewhat difficult environment with the ESG data. There are many people who complain about ESG data. They say corporates disclose what they like. And then you've got great companies that are trying to add value but sit in the middle and organize ratings. We all know that people organize ratings based on the data. But the root of all of that activity, including investor opinions is what companies themselves disclose. And until you have standardized disclosure, if there was a food retailer in Japan discloses the same information as a food retailer in Belgium, it makes the investor job quite a lot harder to kind of disentangle where value might be created just in the same way as normal balance sheet and income statements over the years have become standardized.

Anna [00:07:19] So Rick, when you talk about ESG data, can you just give an example of what you mean by that?

Rick [00:07:24] Sure, when you're talking about normal data, like accounting data, it might be last quarter's or last year's revenue that's what you would use to base your investment decisions on. Perhaps when you're talking about ESG data, it might be things like how much water the business consumed last year or how much CO2 was generated by the business's activities. So the hard bits of data, they are actually bits of data that tell you what happened over some period in the past that's associated with a company that allows you then to make a decision based on whether you think that piece of data is important or not.

Anna [00:08:03] Rick, do you think it's achievable to create those global standards? Do you think that it's realistic what ISSB is trying to do?

Rick [00:08:13] Well, creating the standard isn't necessarily difficult. I've been in those discussions and we can all opine on what we think is important, but we get to a consensus. I think what's difficult is getting widespread adoption. Now, the widespread adoption can come from a number of forces or a number of forces might influence widespread adoption. One is investor is actually asking issuers themselves, so saying, look, we know that you're going to get a lot of requests from MSCI, Sustainalytics, but see, lots of different people ask you for information. But the one that really matters to us is the set of metrics provided by ISSB. And therefore, when we engage with corporates, the extent where investors, many of us come from different geographies, if we're all asking for the same thing, it's more likely that issuers will say, actually, this might be quite productive for us to satisfy a very wide range of stakeholders with one set of metrics. The other force is either regulators or those like IOSCO, who represent securities exchanges around the world so either endorsement or mandated disclosure would have a similar effect. Now, mandated disclosure may be quite difficult, in other words, would regulators say that we absolutely require issuers within our jurisdiction to disclose under ISSB. It could happen, I think there will be places where that does happen. I think more likely you might get endorsement from securities exchanges in other words to say to the issuers who are listing in that jurisdiction, this is a good practice and we support this practice. G7 finance ministers opined on the ISSB proposals again in a positive way. So I think you've got a number of forces that might influence widespread adoption, but it's by no means guaranteed.

Anna [00:10:10] And so then just in a nutshell, what's really needed to pull it off? You know, you're speaking about what's needed to pull it off. I understand what you've just said is, you know, consensus building. But who are the key stakeholders, if you like, that you need to get on board?

Rick [00:10:24] We haven't talked about audit and assurance, but clearly the big four, the kind of the wider service providers are important because issuers have often been concerned about the data management issues and the collection issues involved in sustainability data. I think to the extent they can be helped and reassured by those service providers, that's really helpful. What's more, service providers say, what if you do start disclosing, I will actually be able to provide assurance or even audit on that set of disclosures that will be really helpful. But I think first and foremost, it's an investor driven initiative. And if investors are universal and consistent in their engagement with corporates, then I think it will begin to happen, provided that the cost is not stratospheric. So, I mean, issuers will need to ask themselves how much does it cost for me to collect, to curate and distribute this data and all the risks involved in doing so. So the issuers will look at all those questions and I think that's one of the parts of constructing the standard that we need to make sure the standard is sufficiently rigorous that investors get some meaningful information without it becoming so burdensome, it's infeasible for people to use.

Anna [00:11:57] Before becoming Head of ESG at State Street, you were the CIO of State Street Global Advisors, and I believe you spent much of your career in investment management. How much of a game changer do you think it would be for investors if there was a global standard for disclosure around climate and ESG more broadly?

Rick [00:12:18] I think if you go all the way to the end destination and it was universally available that would be a significant game changer in many respects. One is it would lower the cost because at the moment we're comparing apples and oranges and paying a lot of money for it not that we should just only focus on the cost because good research always costs money. But if you're researching a company and you are interested in value creation and part of that constant is going to be the ESG factors, then you want to acquire high quality information at a low cost and for it to be powerful across sectors, geographies and everything else that's the ultimate goal. And if we get to that goal, my belief is that we'll make better decisions as investors because we'll be equipped with consistent and potentially audited information on these issues. If you contrast that to the current state, there are a lot of information out there not much of it is audited or assured, and it's been consistent across geographies and industries. So that makes the analyst life interesting, we say, because it's challenging, but it's not as productive as it could be.

Anna [00:13:34] I have a question for you about the sort of the difference or I guess, the feasibility of climate disclosure versus ESG disclosure more broadly. Is ISSB prioritizing one over the other like climate more so than ESG more broadly? Is there any controversy around that? Are they both as important as each other? How do you view that?

Rick [00:13:59] Well, firstly, ISSB are not the only ones focusing on climate disclosures. TCFD has led many other, in some cases, regulatory agencies to begin to require corporates to make better disclosures about climate related risks. And TCFD to some extent has standardized that set of data assets as well. But they're not the only ones and people have been at the climate disclosure question now for quite a while. So you could say it's quite mature and the dimensions are pretty well known, in other words, what types of things a corporate is likely to be required to disclose. So because of that, I think it's right in ISSB to prioritize climate. It's important to investors. Regulators are looking at it. We're quite mature in the way that we are developing what metrics are. It's not so, it's not without controversy. I mean, there are areas where some would say, you know, I really want this set of data and others say, well, that may not matter quite so much to me. And yet with the important issues or long-term issues, which are quite hard to disclose. So if you're asking some of the most important questions, how is a company going to transition its business over the next five, ten, 15, 20 years? And in many cases, the technology may not be there. So the disclosure will, by necessity, be pretty limited but I think they're starting in the right place.

Anna [00:15:28] In terms of the timeline for the global standards, is there a sense of when we would expect to see them be released publicly?

Rick [00:15:37] We're going to see a lot of releases this summer from ISSB, and that puts us on a timetable for implementation in 2024 or 2025 that will encompass climate and also encompass the political the general requirements on sustainability. What it does not yet contain so there's kind of the next chapters that will unfold will be nature-related disclosures to natural capital, biodiversity related, which is going off everyone's agenda and social. In other words, what are the other issues to do over human capital, customers, communities that are relevant in value creation? So there's a lot that's going to happen quite quickly. And I think when the ISSB was launched, which was at COP26 in Glasgow, I don't think anybody expected progress would be so rapid, partly because the parents, if you like, of ISSB were a number of different organizations in themselves were quite well-developed. But getting to a consensus in those organizations was something that happened much quicker than people thought.

Anna [00:16:55] So when do we expect the ISSB to release its climate and general ESG standards?

Rick [00:17:02] Yes, I think investors need to examine their own investment process first and foremost and say, how do I manage money and how do I think ESG data is important in my investment process? In the ideal world, what would I really want to know about a corporation in order that I can make well-informed judgment about that company. And at the moment, there is a lot of data out there saying it's not official, it's voluntary. So first question for investors is how does the ISSB set of metrics line up against the types of data that they already have or are made available by those service providers that stood in the middle? And I think it's likely that investors will look at that data and some of them say, I need a much richer set of data. So some who are very focused on an area of sustainability might say I like the ISSB, but there's much more depth I need to get to and therefore I need to go to the company directly. But I think for the most part, investors will say, yes, this is a pretty rich data set, and if I can apply it consistently across my universe that's going to be a pretty helpful tool. But it really does start and end with your own investment process. There is a sort of addendum to that, which is what do your clients want, so it's very important how you invest the money, but it's also important how you report your clients and for regulatory purposes as well. And so how does the ISSB set of data line up against how I want to keep my clients informed about the composition of the portfolio because in the best case scenario, you've got a perfect match between what I consider to be relevant for an investment process to what's available in ISSB to what the clients want to see as they report to their own stakeholders. So that's the ideal case and I think there's a good chance of that's going to work well for a lot of investors.

Anna [00:19:04] Great, I've covered a lot of the questions I had on my mind, is there anything that you think that we've missed in our discussion?

Rick [00:19:13] The implications are interesting for different people, so for issuers, they might have a somewhat easier landscape maybe that's wishful thinking in the sense that they may have fewer demands on them if they can subscribe to supplying the ISSB data. I suspect that for investors it may be a richer and more authoritative dataset on which to make investment decisions. But the other important constituency, if I'm thinking about our own clients, is the people who are managing data within an organization. With ESG data, they often have a significant headache. They got to do regulatory reporting. They got to satisfy the analysts and the portfolio managers. They got to report to clients and the data doesn't seem to be very reliable. It doesn't line up and mismatches so again, if you kind of project yourself forward, we could be at a point where that data management question and the cost of both sucking in data and processing it could be significantly enhanced in terms of the efficiency level. And when I think about our clients, we've had many discussions about stewardship of that ESG data, how State Street itself can help. But within large institutions whether they're asset-owned or asset managers that has been a headache. And I would say the headache is not going to go away very soon but this is absolutely mixing my metaphors a little bit, it's the light at the end of the tunnel that might begin to address the headache that many have.

Anna [00:20:43] Terrific and finally, I guess if there's one message that you could leave our listeners with about the ISSB, what would that be?

Rick [00:20:53] I think, use every opportunity to engage. ISSB is very open. So if you have an opportunity to respond to a consultation wherever you are in an investment organization, I would seize that opportunity and I would look at how it can be helpful to your organization if it does begin to get traction. So I think respond to consultations, engage with them and educate also the organization, because the implications are quite positive and they're quite profound. So this is not just yet another bit of the alphabet soup. It could be more significant and positively impactful for asset owners and asset managers.

Anna [00:21:36] Fantastic, thank you so much, Rick. It's just been great to chat with you today.

Rick [00:21:40] Thank you.

Anna [00:21:41] Thank you so much for listening today and look out for more podcasts from us on ESG standards, regulations and policy and to learn more about ESG, go to the Insights page of statestreet.com