Typically, accounting rules and standards do not elicit much enthusiasm. And yet, they address a basic need of humankind. Throughout history, households and organisations have come up with ways to keep track of their finances. As trade across geographies intensified and capital accumulated, accounting evolved in kind. New elements were added to the mix, such as the double-entry bookkeeping that was perfected in the Renaissance and remains the basic principle of accounting to this day. 

In recent times, accounting standards have served the needs of shareholder capitalism well. The rise and spread of International Financial Reporting Standards (IFRS) have been a tremendous driver of global finance and investment. They have provided interested parties with comparable documents to gauge the financial performance of institutions in the private and public sectors. They oriented capital allocation accordingly. 

In what might become the biggest zeitgeist moment for accounting in recent history, the IFRS is now about to incorporate standardised measures of sustainability. The first two principles of the international sustainability standards — IFRS S1 on the General Requirements for Disclosure of Sustainability-related Financial Information and IFRS2 on Climate-related Disclosures — are due to be released by the end of June, and their application, via both legal adoption of jurisdictions and voluntary disclosure of the markets, will begin in January 2024. 

Companies will be required to make disclosures about their governance and risk management of sustainability and climate-related risks and opportunities, as well as the strategy, metrics and targets used to manage those risks and opportunities. 

Market oversight institutions, including policy-makers, regulators, stock exchanges and standard setters, will facilitate adoption of the new standards as the global baseline of sustainability-related financial disclosures. 

“Sustainability factors are becoming a mainstream part of investment decision-making. The provision of rigorous, reliable and comparable sustainability information enables informed investment and economic decisions in the public interest,” reads the website of the International Sustainability Standards Board (ISSB), which was set up at COP26 in November 2021 to develop “a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets”.

These requirements will add to trade and investment policy pressures from both host and home states, and will redefine the notion of competitiveness and access to global financial markets along the whole investment value chain: from the world’s biggest pools of capital, to multinational corporations (MNEs) and small and medium-sized enterprises (SMEs) alike. Host countries are no exceptions: upholding the new standards through domestic jurisdiction will become a key pillar of their investment environment, thus determining their capacity to attract international investment in productive capacity and sustain long-term growth and employment. 

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The ability of private and public institutions alike to harness sustainability issues will thus become a critical determinant for foreign direct investment (FDI) and the development of global value chains (GVCs). All the main parties in the FDI and GVCs ecosystems will be impacted. In particular: 

• MNEs need to improve their sustainability performance to be accountable before their shareholders with regard to financing; before their stakeholders with regard to the common resources they use. 

• SMEs need to comply with the sustainability standards to secure financing, as well as gaining or maintaining access to global supply chains and regional industrial clusters. 

• The 7000 existing special economic zones in 140 countries need to implement the global standards and improve their sustainability performance as a new means of competing for FDI, production facilities and clusters. 

• For host countries, the adoption of the global sustainability standards and their sustainability performance must become a new source of competitiveness for attracting FDI and international investment in production capacity, particularly in export-oriented investment projects, as well as projects in green and blue economies. This is due to the fact that mainstreaming sustainability in the host country policy framework is becoming an important locational determinant for FDI.

• As the main sources of global FDI are mainly advanced countries and sustainability advocates, the sustainability standards will naturally apply to their MNEs. Therefore sustainability standards and performance will be benchmarks to access outbound FDI incentives and guarantees. 

The new standards promise to provide a practical representation of the sustainability profile of public and private institutions, whose competitiveness will hinge on their sustainability performance moving forward. The opportunity is enormous: according to Unctad’s World Investment Report figures, financial institutions have deployed nearly $6tn in financing sustainable development sectors, including equity funds, green bonds and social bonds — and counting. They will translate into myriad possibly transformative FDI projects for geographies the world over. The application of the soon-to-be-released standards will be key unlocking that gargantuan pool of capital. 

James Zhan is director of investment and enterprise at the United Nations Conference on Trade and Development. 

Jacopo Dettoni is the editor of fDi Intelligence.