This Monday, June 26^th the International Sustainability Standards Board (ISSB) released its first reporting standards – IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures – moving towards equal prominence for sustainability and financial reporting. Both fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and build off the Climate Disclosure Standards Board (CDSB) and industry-based guidance from the Sustainability Accounting Standards Board (SASB). [1] The standards are expected to improve user trust and confidence in company disclosures on sustainability to enable better decision-making for investment decisions. [2]

 

One of the biggest challenges that currently exists in the market is a lack of standardization among ESG disclosure standards. Too often companies are faced with standards which place higher priority on different areas of ESG. For example, while the Global Reporting Initiative (GRI) covers an organization’s impact on the economy, the environment and society, SASB is focused on financial material sustainability topics. This means SASB’s more industry-specific framework is traditionally catered towards investors. [3]

 

With the growing desire by investors to understand both societal as well as financial impact, disclosures covered by both SASB and GRI are now considered an important part of company analysis. In response, the release of ISSB’s disclosure standards on Monday represent a stepping-stone in the right direction as they are designed to create a global baseline of sustainability-related financial language. Answering a clear market demand for complete, consistent, comparable, and reliable corporate sustainability disclosures, the adoption of ISSB’s standards usher in potential to accelerate greater market transparency, and to help companies achieve a smooth transition to net-zero and build a more resilient and sustainable global economy. [4]

 

Moreover, the support for a comprehensive global baseline of sustainability-related disclosures highlights the desire for a consistent understanding of how sustainability factors impact companies’ futures. Mary Schapiro, Head of the of the Task Force on Climate-related Financial Disclosures (TCFD) stated in response to the release, “The global economy needs common reporting standards to reduce fragmentation and drive comparability in climate-related financial data”.

 

The ISSB’s standards, intend to be used alongside financial statements, ensuring that companies include sustainability-related information in their reporting. These standards can be used alongside any accounting requirements and are based on the principles of the widely adopted IFRS Accounting Standards. They are globally applicable, establishing a universal foundation for sustainability reporting. [5]

 

Additionally, the release of the ISSB Standards have been long in the making with comprehensive deliberation and analysis made on what should and should not be included. One of the key areas of focus during the discussions was interoperability. The ISSB has weighed and incorporated interoperability considerations throughout its decision-making process to ensure greater alignment between the Standards and jurisdictional requirements. This includes the acknowledgment and approval by several stock exchanges globally. Jane Goodland from the London Stock Exchange Group (LSEG) states “the ISSB Standards are an interoperable global baseline for corporate sustainability reporting that is urgently needed”. In addition, Jane encourages policymakers to adopt the ISSB’s new standards as a global baseline by 2025, a move which should facilitate easier integration and comparability of sustainability reporting across different regions and frameworks. [6]

 

Another important aspect addressed by the ISSB was proportionality. The board introduced proportionality mechanisms to accommodate companies with varying skills, capabilities, and resources. This approach will now allow companies to disclose sustainability-related information using reasonable and supportable data that is available without incurring undue cost and effort.

 

The feedback received by the ISSB also highlighted the need for industry-specific disclosures. As a response, the ISSB board confirmed the requirement for companies to provide industry-based disclosures. To assist entities in this regard, the ISSB provided illustrative guidance that includes examples of industry-based disclosure topics and metrics which companies must consider and refer to.

 

Changes to Materiality Approach

 

One critical component which is essential in the new standards is materiality, as it enables companies to prioritize relevant sustainability information for primary users such as investors and creditors. Instead of following a predefined list, companies exercise their judgement to determine which information is most useful. This includes details on how the company generates or diminishes value, which aids investors and creditors in evaluating the company’s future potential. [7]

 

In line with IFRS Accounting Standards, the ISSB has made certain adjustments to enhance the clarity and consistency of its materiality description. To achieve this alignment, the definition of ‘enterprise value’ and the phrase ‘to assess enterprise value’ have been eliminated from the objective and materiality description. Moreover, the term ‘significant’ will no longer be employed when disclosing sustainability-related risks and opportunities. [7]

 

In summary, the ISSB standards seek to provide clarity on applying materiality judgments to sustainability-related financial disclosures without introducing major changes. To comply with these standards, companies are required to review their materiality assessment processes, considering resources, relationships, and relevant risks and opportunities. Companies with prior experience in sustainability reporting may even need to adapt their approach. It’s important to note that unlike a ‘double materiality’ approach, the proposed standards prioritize information that is relevant to investors and creditors, rather than encompassing all stakeholder impacts.

 

Applying the ISSB Standards is also expected to result in improved data quality, benefiting areas such as governance, strategy, access to capital, cost of capital, reputation, and employee and stakeholder engagement. Academic research, market research, and voluntary standard-setters have largely confirmed these anticipated benefits. Furthermore, the availability of high-quality information is expected to assist investors in making better-informed investment decisions.

 

The ISSB Standards will be effective from January 2024 and by 2026 it is expected that Companies will need to provide full reporting on Scope 3 emissions and climate-related risks and opportunities. Companies that already use existing market sustainability standards are likely to find the implementation of the ISSB Standards easier, aided by the several workshops and support available from ISSB particularly for companies in emerging markets. Ultimately, the ISSB works closely with jurisdictions, but it is for the jurisdictional authorities to decide to mandate the use of the standards which will slowly become clearer in the coming months. [8]

 

Sources

https://www.greenbiz.com/article/first-issb-reporting-standards-are-here-what-means-investors

https://www.climateaction.org/news/issb-issues-inaugural-global-sustainability-disclosure-standards

https://www.nordea.com/en/news/gri-sasb-cdp-making-sense-of-overlapping-sustainability-and-climate-disclosures

https://www.fca.org.uk/news/news-stories/fca-welcomes-launch-issb-standards

https://www.ifrs.org/news-and-events/news/2023/06/issb-issues-ifrs-s1-ifrs-s2/#:~:text=On%2026%20June%202023%20the,disclosures%20in%20capital%20markets%20worldwide.

https://www.ifrs.org/news-and-events/news/2023/06/issb-issues-ifrs-s1-ifrs-s2/

https://kpmg.com/xx/en/home/insights/2022/10/issb-materiality.html

 https://www.allianzgi.com/en/insights/sustainability-blog/issb-sustainability-reporting