Overview

Measuring and disclosing climate and other ESG risk and opportunity factors is now widely expected by investors and other stakeholders as part of good business practice. However, the ever-increasing number of standards and frameworks available is creating a complex and burdensome disclosure landscape. In this context, the IFRS Foundation has announced it will consolidate a number of existing approaches to create an International Sustainability Standards Board (ISSB). This will provide a globally consistent baseline for disclosure of sustainability-related information, integrating and building on elements of several frameworks and standards including the Climate Disclosure Standards Board (CDSB), the Value Reporting Foundation (VRF) including the Integrated Reporting Framework and SASB Standards, the International Accounting Standards Board (IASB), the Task Force on Climate-related Financial Disclosures (TCFD), and the World Economic Forum (WEF).

“The intention is for the ISSB to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.”

— IFRS - International Sustainability Standards Board

Standard details

The announcement was made at COP26 in November 2021, with support from leaders in 40 jurisdictions across 6 continents. The initial recommendations set out by the ISSB working group (TRWG) include two key deliverables:

the Climate Prototype, which sets out how corporates should identify, measure and disclose climate-related financial information; and
the General Requirements Prototype, which “sets draft requirements on sustainability-related financial disclosure of all sustainability-related matters in an issuers’ general-purpose financial report”.¹

The new requirements are based on TCFD’s recommended disclosures (governance, strategy, risk management, metrics, and targets), and SASB’s 77 industry-specific standards, with additional inputs from other frameworks and stakeholders such as the IASB Board’s management commentary proposals. The ISSB standard incorporates financial reporting (e.g. IFRS Accounting Standards) alongside sustainability.² ISSB will adopt a “building blocks approach” enabling national and regional jurisdictions to expand on the global baseline to set additional standards relevant to their own needs.

Criticism - enterprise value vs double materiality

The ISSB standard has come under scrutiny for its primarily enterprise-value based approach, which focuses on how climate-related risks are impacting companies’ financial performance without accounting for the impacts of companies on the environment and wider society, known as “double materiality”.³ This approach seeks to ensure that both financial and non-financial risks and opportunities are accounted for, and is already expected under the EU’s Sustainable Finance Disclosure Regulation (SFDR), leading some commentators to suggest it’s likely the ISSB standard will eventually incorporate double materiality requirements.

The PRI has also noted the potential for improvement to the general prototype through engagement with local regulators and standard setters to maximise interoperability with regional and other corporate reporting standards.⁴ On the climate side, it recommends the inclusion of disclosure of material activity and sector-specific greenhouse gas emissions to allow investors to compare firms within a sector.⁵ It also recommends inclusion of disclosures to reflect the alignment of reporting firms’ strategy and business model with the objectives of the Paris Agreement “to better capture companies’ resilience to uncertain and rapidly changing environmental policy across jurisdictions”.⁶

Timeframe

Though the ISSB climate standard is currently being refined, the International Organisation of Securities Commissions (IOSCO) suggests the consultation and approval process could be finalised by July 2022, with adoption by international member securities regulatory bodies by the end of the year (depending on jurisdiction).

What next - how to prepare

Many organisations will be familiar with the underpinnings of ISSB (i.e. TCFD and SASB), and thus well placed to adopt the new standard (in the meantime, those standards still apply). However, as implementation is likely to be rapid, organisations are advised to examine closely the contents of the prototype requirements to ensure they have the right information, metrics, and data gathering processes in place when the time comes. For example, for those currently reporting to TCFD, there may be additional requirements to disclose issues beyond climate and include sector/industry information. As jurisdictions are able to create supplementary conditions, they’ll also need to stay up to date with how the standard is being adopted in relevant jurisdictions, and any changes that may precipitate.

Investors have long been calling for more transparency and consistency in sustainability disclosures from corporates to aid the investment process and we believe the ISSB goes a long way to supporting this need.