With all eyes and ears on what the Securities and Exchange Commission (SEC) will be finalizing this spring regarding its proposed “Enhancement and Standardization of Climate-Related Disclosures for Investors” rules, some corporate reporters might be less aware of the other big headline and newest acronym in sustainability disclosure — the International Sustainability Standards Board (ISSB).
The ISSB, which sits under the International Financial Reporting Standards (IFRS) Foundation, officially released a new and consolidated global baseline of sustainability reporting standards, known as the IFRS Sustainability Reporting Standards. It is not a coincidence that a new body for global sustainability disclosure standards is housed under the same organization as the International Accounting Standards Board (IASB). This demonstrates a clear and global direction of travel: companies must prepare for a future where their ESG data and disclosure will need to be managed and disclosed with the same rigor and controls as financial data.
Why is the ISSB important?
First and foremost, the recently formed ISSB represents a significant achievement in the long-called-for consolidation of a fragmented, patchwork landscape of sustainability and ESG-related reporting frameworks. In its own words, the ISSB is developing “standards that will result in a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets.” The ISSB builds on the work of market-led investor-focused reporting initiatives, including the Climate Disclosure Standards Board (CDSB), the Task Force for Climate-related Financial Disclosures (TCFD), the Integrated Reporting Framework, the industry-based Sustainability Accounting Standards Board (SASB) Standards, as well as the World Economic Forum’s Stakeholder Capitalism Metrics.
Source: Kirkland & Ellis
To support the adoption of the standards (S1 and S2), the ISSB is now focusing efforts on capacity building by working with partners from jurisdictions globally to deliver education and raise awareness. Among the growing number of prominent backers, the International Organization for Securities Commissions (IOSCO) released a statement welcoming the ISSB’s decision to enter into the finalization phase of its corporate sustainability reporting standards. In a letter to the G20 Finance Ministers and Central Bank Governors, the Financial Stability Board (FSB) called the finalization of the ISSB’s standards in the first half of this year a “pivotal goal” in addressing climate-related financial risks. Audit standard setters International Ethics Standards Board for Accountants (IESBA) and International Auditing and Assurance Standards Board (IAASB) are also aiming to have assurance standards available before the end of 2024 — and both have publicly committed to coordinating their work with the ISSB’s.
Key elements of the new IFRS S1 (General Disclosure Requirements)
- Asks for disclosure of material information about a company’s sustainability-related risks and opportunities, using the same definition of materiality that is used in IFRS Accounting Standards (information that, if absent, obscured, or misstated, could be reasonably expected to influence investor decisions)
- Emphasizes the need for consistency and connections between financial statements and sustainability disclosures, requiring financial statements and sustainability disclosures to be published at the same time
- Requires that companies consider the SASB Standards to identify sustainability topics and metrics to disclose in the absence of a specific ISSB Standard
- Follows the same structure as the TCFD Framework, divided into Governance, Strategy, Risk Management, and Metrics and Targets
- Includes concepts from Integrated Reporting Framework, and work between the ISSB and International Accounting Standards Board (IASB) is underway to more closely integrate the Integrated Reporting Framework
- Requires companies to disclose sustainability-related risks and opportunities as part of their “general purpose financial reports
Key elements of the new IFRS S2 (Climate-related Disclosure Requirements)
- Sets out disclosure of material information about climate-related risks and opportunities, including disclosure about physical risks (such as flood risk), transition risks (such as regulatory change), and climate-related opportunities (such as new technologies)
- Provides companies more time to embed and improve processes for measurement and disclosure of Scope 3 emissions through guidance and reliefs (reporting on Scope 3 emissions will not be required in the first year a company applies S2, but will be mandatory to all companies thereafter)
- Incorporates the TCFD Recommendations and includes SASB Standards’ climate-related industry-specific topics and metrics as illustrative guidance
What is happening to the SASB Standards?
According to the IFRS Foundation, the SASB Standards will continue to be supported on a standalone basis by the ISSB for at least four years (and likely longer), while the ISSB continues its standard-setting activities using the SASB Standards as a basis. The ISSB has committed to ensuring the SASB Standards are maintained and enhanced over this time, with any proposed changes being subject to public consultation. A group of ISSB members — chaired by Jeff Hales, former Chair of the SASB Standards Board — has been established and tasked with developing recommendations for the ISSB related to the maintenance, evolution, and enhancement of the SASB Standards.
Preparing for the new IFRS Sustainability Disclosure Standards
The messaging from the ISSB has been loud and clear here: companies should continue using and adopting (or start, if not yet doing so) the SASB Standards, TCFD Recommendations, and other relevant frameworks, because the ISSB has built on these materials:
“As requested by our stakeholders, we have built from existing market-accepted frameworks and standards. This means the thousands of companies already using the TCFD recommendations and SASB Standards will be in a strong position to use S1 and S2.”
– Emmanuel Faber, ISSB Chair
Other long-standing best practices continue to apply. Companies need to consider the sustainability and ESG-related risks and opportunities that impact their business. They should engage their key stakeholders (e.g., investors, suppliers, employees, customers) to uncover and better understand these impacts. Leadership teams should be evaluating their internal systems and processes for gathering ESG data and information and the controls for ensuring the quality of this data and information. Finally, companies need to disclose this performance regularly and transparently across these material topics and show their continuous integration into risk management and strategic planning processes.
Impact on companies, ESG practitioners, and investors
Back in February of this year, I was fortunate to be able to attend the inaugural IFRS Sustainability Symposium in Montreal where there was a balanced and inspiring mix of investor, academic, international standard setter, and corporate reporter participants. While the pandemic pause on in-person events has likely made my memory a bit rusty, I personally have never seen such a broad and representative cross-section of global stakeholders and decision-makers at a conference dedicated to sustainability disclosure. The excitement for a future where the untenable corporate reporting burden might no longer distract sustainability teams from actual strategy development and execution — as well as for a future where investors can compare apples-to-apples, high-quality ESG data from issuers around the globe — was palpable.
What was maybe once a pipe dream, this consolidated and standardized future in sustainability disclosure — whether driven by the ISSB, SEC, or the EU — is something worth being excited about. The momentum surrounding the ISSB and these new standards across global jurisdictions and financial communities of practice (audit, assurance, securities regulators, and more) cannot be understated. While there remain detractors of the ISSB who say the new standards do not go far enough to hold corporate reporters accountable to the underlying existential crises such as climate change and biodiversity loss, the keywords “global baseline” are important to keep in mind when considering their scope. This is a critical step in establishing comparability across ESG data and disclosures for stakeholders. I’m hopeful that, by providing companies a clear pathway to begin measuring and reporting their performance on these material issues, the IFRS Sustainability Disclosure Standards will further contribute to the level setting needed for global capital markets to properly value (and incentivize) long-term ESG and sustainability performance.