Building Trust: How Stock Exchanges Foster Ethical Sustainability Reporting

I - In an era where transparency and accountability are paramount, the role of ethics in sustainability reporting and assurance in ensuring the quality of the information provided to investors and maintaining the integrity and stability of stock exchanges globally cannot be overstated.

The rapid advancements in global sustainability reporting bring associated risks concerning the ethics and independence of preparers and assurers. Poor-quality reporting, including “greenwashing” and consequential faulty investment and trading decisions by market agents can lead to severe market issues and erode trust in published information, requiring vigilance from all parties involved.

When ethics and independence issues - such as conflicts of interest, pressure from management, lack of competence or integrity, and financial interests - influence the work of preparers and assurers, there is a risk that the information provided to investors and other users will be biased, incomplete or manipulated, generating severe disruptions in the market.

Stock exchanges play a fundamental role in ensuring that all products traded on their platforms not only comply with applicable sustainability reporting and assurance frameworks, but also that such information is prepared and assured in accordance with strong ethics and independence standards.

Despite the challenges posed to stock exchanges with respect to their regulatory and supervisory responsibilities in a post-mutualised era, such responsibilities are inherent to the business model itself and the license to operate. Setting high quality requirements that include the preparation of information in accordance with robust, globally accepted ethics standards (applicable to products that are traded on these platforms) and ensuring appropriate monitoring practices over the ethical quality of the information helps ensure that investors get relevant, reliable information. This demonstrates the advantage of trading on regulated stock exchanges over unregulated systems and justifies their business model and the value it provides.

II – The aforementioned applies, mutatis mutandis, to financial and sustainability information provided by listed issuers and their products. However, it is worth emphasising that those considerations become particularly important in the context of sustainability information.

Firstly, due to its more forward-looking and narrative nature, and to the immaturity of underlying data and metrics, sustainability information is more susceptible to bias triggered by a lack of ethics and independence.

Secondly, we all have learned enough about the regrettable consequences of unethical behaviour in companies and audit firms affecting the quality of information provided to investors, resulting too frequently in big failures and collapses and in a trust crisis. Creating a fresh strategy for sustainability information should involve all stakeholders to prevent the consequences resulting from issues like regulatory and standards fragmentation and to ensure ethics are not treated as an afterthought.

III – Consequently, there is a collective responsibility in making the new sustainability framework successful as a valuable element of market dynamism and integrity, benefiting investors, stock exchanges and the broader economy.

The IESBA has recognised its responsibilities in this field as an ethics standard setter and opted, in June 2022, to develop fit-for-purpose, globally applicable ethics and independence standards tailored for sustainability reporting and assurance. These standards will complete the infrastructure for trustworthy sustainability information and provide the market with a globally accepted and recognised framework that stock exchanges may use as a benchmark to mandate and maintain appropriate and consistent sustainability information.

The IESBA’s International Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code) already provides a comprehensive set of standards for ethical behaviour. It is used in more than 130 jurisdictions worldwide and translated into approximately 40 languages. The Code sets out five fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour, which establish a standard of expected behaviour and reflect recognition of the responsibility to act in the public interest. It provides a conceptual framework to identify, evaluate and address threats to compliance with those principles (and independence where applicable). Furthermore, the Code helps individuals apply the conceptual framework when dealing with ethical dilemmas such as, exercising professional judgment and discretion, conflicts of interest, inducements, pressure to breach the fundamental principles, and acting with sufficient expertise).

Protecting Investors’ Interests

The IESBA Code supports investors and other users’ decisions. One of the principles guiding IESBA’s sustainability activities is that ethics are a means to an end, to contribute to and rebuild trust and confidence in businesses and markets and support well-functioning economies and societies. This means fostering appropriate behaviours and actions from preparers and assurers of sustainability information, so that users of such information can make confident and informed investment decisions.

IESBA’s Sustainability Journey

Both the International Organization of Securities Commissions (IOSCO)¹ and the Financial Stability Board (FSB)² publicly recognised the complementary nature of the work of both the IESBA and the International Auditing and Assurance Standards Board (IAASB) and welcomed the two global standard-setting Boards’ plans to develop high-quality, global assurance and ethics (including independence) standards that are profession-agnostic and can support limited and reasonable assurance of sustainability information. The IESBA committed resolutely to respond to IOSCO’s and FSB’s calls as a matter of the highest strategic priority.

In January 2024, the IESBA issued proposed International Ethics Standards for Sustainability Assurance (including International Independence Standards) (“IESSA”), as a new standalone Part of the IESBA Code applicable to all sustainability assurance practitioners regardless of their backgrounds, and other proposed revisions to the existing IESBA Code addressing sustainability reporting for professional accountants.³ Critical to the public interest, the IESSA aims to create a level playing field, where all sustainability assurance practitioners are subject to the same high standards of ethical behaviour and independence.

These ethics and independence standards will act as the third pillar to trustworthy sustainability reporting and assurance, alongside sustainability reporting and assurance frameworks, including those developed by the International Sustainability Standards Board (S1 and S2), the European Commission (ESRS) and IAASB (ISSA 5000). This recognises the foundational role of ethics and independence in the preparation, presentation and assurance of sustainability information.

Next Steps in the IESBA’s Sustainability Journey

The IESBA is in the process of finalising the standards, after an impactful consultation process, and they are anticipated to be approved in December 2024.

The IESBA is committed to promoting broad adoption and implementation of the IESSA and aiding capacity building particularly for sustainability assurance practitioners from outside the accountancy profession. In February 2024, the IESBA and the International Accreditation Forum (IAF) announced a strategic partnership that will result in the IAF stipulating to national accreditation bodies globally that the IESSA is to be used when accrediting and authorising conformity assessment bodies to carry out sustainability assurance. The IESBA recently agreed to establish a working group to develop a strategic approach to support adoption and implementation and capacity building, which during 2025 will include developing webinars, implementation guidance, case studies and FAQs.

The IESSA will, therefore and for the first time, extend the impact of the IESBA Code beyond the accountancy profession to all sustainability assurance practitioners. However, the IESBA also observed when developing its 2024-2027 Strategy and Work Plan that there is a public expectation that all preparers of financial and non-financial information should be subject to the same high ethics standards. Accordingly, the IESBA aims to further extend the impact of the IESBA Code by exploring the development of profession-agnostic standards for sustainability reporting under a new work stream in 2025.

Role of Stock Exchanges and Issuers in Ethics

In my previous role as a securities regulator, namely as Chair of the Portuguese Securities Commission and an IOSCO board member, I developed a sound understanding of the needs of capital markets and the connection between high-quality, ethically prepared corporate information, supported by robust standards, and well-functioning capital markets.

Stock exchanges play an important role in implementing systems to ensure that information provided to investors is accurate and reported in accordance with the highest ethical standards. By raising transparency and discouraging unethical practices, exchanges can accumulate “reputational capital,” and promote differentiation and competitiveness. However, the ‘profession-agnostic’ nature of sustainability reporting and divergent ethics codes across, or even within, industries, can impede the exchanges’ ability to consistently assess risk. Having the same global framework of robust ethics and independence standards for all issuers enables rigorous supervision by exchanges.

As a standard setter, the IESBA cannot mandate adoption or enforcement of the IESBA Code. Therefore, it is imperative that issuers and stock exchanges advocate adoption of the IESBA Code within their issuing jurisdiction and set up strong practices and requirements for its effective application. This necessitates setting the tone from the top, including ethics as part of corporate and stock exchanges’ strategy, and acknowledging the systemic impact of ethical failures. Corporate governance codes should also consider and integrate ethics standards and behaviours and establish policies and procedures that facilitate compliance. The revised OECD Corporate Governance Principles 2024, by including a new chapter on sustainability and resilience and a clear reference to the importance of international ethics and independence standards, clearly provide the tone and policy direction for the integration of ethics, sustainability and corporate governance.

The IESBA sustainability standards will provide an exceptional basis for such integration and allow consistency, convergence and comparability as opposed to the concerning fragmentation resulting from a variety of different ethics codes across professions and industries. By working together, we can shape the future of ethics and sustainability, and contribute to a more resilient, inclusive and sustainable economy.

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_{[1] IOSCO encourages standard-setters’ work on assurance of sustainability-related corporate reporting}

_{[1] Supervisory and Regulatory Approaches to Climate-related Risks: Final report (fsb.org)}

 _{[1] Proposed International Ethics Standards for Sustainability Assurance (including International Independence Standards) (IESSA) and Other Revisions to the Code Relating to Sustainability Assurance and Reporting | Ethics Board}