The new International Sustainability Standards Board: shaping the future of ESG disclosures

The declarations and commitments made at COP26 in Glasgow raised the hope for the world to limit global temperature change below 2°C. For the investor community, a huge step forward was taken towards establishing reliable and comparable standards for sustainability reporting when the IFRS Foundation announced, in Glasgow, the formation of a new International Sustainability Standards Board (ISSB).

The IFRS Foundation made three major announcements on November 3rd, 2021:

• The creation of the ISSB to develop an extensive global standard of high-quality sustainability standards to answer investors’ information needs.
• A commitment by organisations that focuses on sustainability disclosures to consolidate into the new ISSB Board. By June 2022, the consolidation of the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) will have been completed by the IFRS Foundation. The VRF was formed by the merger of the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB).
• The publication of prototype climate and general disclosure requirements was developed by the Technical Readiness Working Group (TRWG) formed by the IFRS Foundation Trustees to undertake preparatory work for the ISSB. The prototype was the joint work of CDSB, VRF, International Accounting Standards Board, TCFD, World Economic Forum, and the International Organization of Securities Commissions (IOSCO).

The consolidation of different standard setters will address one of the biggest hurdles in relation to disclosure as investors increasingly seek sustainability information amid worldwide concerns about climate change. The existence of multiple frameworks and standards adds to the problem for the investor’s decision-making process.

A need for universal standards

We can see today that clients, employees, citizens, authorities and investors call for more organisational transparency that goes beyond the traditional financial metrics. Organisations “can’t manage what they can’t or don’t measure” and they can’t build trust without consistent and comparable information on an array of metrics, including sustainability metrics. Therefore, there is an urgent need for a universally accepted set of standards. The problems we face today range from an over-dependence on models and assumptions to poor quality data regarding emissions along companies’ supply chains.

There have been previous efforts to develop a single global reporting standard. The Group of Seven (G7) will make climate reporting imperative in line with TCFD. Recently, the finalisation of the EU Taxonomy will help investors to have access to verified climate-related data of large EU companies and financial institutions.

It has been long known that adopting the structure and consistency of financial reports could be the solution to the ESG reporting challenges. The announcement of the ISSB is a move in the right direction. Its parent organisation, the IFRS Foundation, successfully governs how financial reporting is conducted in more than 150 countries.

ISSB and the way ahead

The IFRS Foundation has made it clear that the disclosure standards developed will not be a one-fits-all. The decision-makers and regulators in the countries can decide whether it would be applicable in totality or with certain exemptions or additionalities depending on national circumstances.

Moreover, the European Union, which has already made significant progress by implementing the EU Taxonomy, has also supported this initiative by the IFRS Foundation along with 39 other jurisdictions.

The start provided by the TRWG means that the development of these disclosures standards is likely to be accelerated along with a shorter feedback window. Therefore, it is important for the corporations in countries that supported the IFRS Foundation initiative to keep themselves prepared for the upcoming ESG disclosure standard that is most likely to be finalised by the end of 2022 or early 2023. And moreover, delay in finalising the ISSB standards could lead to duplication as multiple jurisdictions are already working on their Green Taxonomy.

The Association of International Certified Professional Accountants has received this new announcement as a great advancement. They see it as a way for developing consistent, reliable, and comprehensive global sustainability standards paving the way for a more sustainable future and economy.

The IFRS Foundation, with the creation of the ISSB to act as a global standard-setter working with the IASB, has developed a model for comprehensive and homogenous disclosures allowing interoperability among the different jurisdictions, unlike the previous and current sustainability standards we have seen to this day.

On December 16, 2021, the Trustees of the IFRS Foundation announced the appointment of Emmanuel Fabre as Chair of the ISSB, effective on January 1, 2022. The former Chair of the Board and CEO of Danone, Fabre has always highlighted the importance of sustainability information to the global capital markets and to investors' decision-making.

Updates on the ISSB

On March 31st 2022, the ISSB published two exposure drafts to establish a baseline on:

1. General sustainability disclosure requirements; and
2. Climate-related disclosure requirements.

The two exposure drafts answer calls from primary users of general purpose financial reporting, such as investors and lenders, for more consistent, comparable, complete, and verifiable sustainability-related financial information, which will help them to assess entities’ enterprise value.

1. General sustainability disclosure requirements

The objective of the first exposure draft is to require an entity to disclose information about its significant sustainability-related risks and opportunities. This will be beneficial to the primary users of general purpose financial reporting when they assess enterprise value and decide whether to provide resources to the entity.The sustainability-related financial information that should be disclosed is broad, and could include information about:

1. An entity’s governance of sustainability-related risks and opportunities, and its strategy for addressing them;
2. Decisions made by the entity that could result in future inflows and outflows that have not yet met the criteria for recognition in the related financial statements;
3. The entity’s reputation, performance and prospects as a consequence of the actions it has undertaken, such as its relationships with people, the planet and the economy, and its impacts and dependencies on them; and
4. The entity’s development of knowledge-based assets.

2. Climate-related disclosure requirements.The objective of  the second Exposure Draft is to require entities to provide information about their exposure specifically to climate-related risks and opportunities. Like the first exposure draft, this information, coupled with other information provided as part of an entity’s general purpose financial reporting, will assist investors and other users of the information in assessing the entity’s future cash flows.The requirements of the Exposure Draft would instruct an entity to provide information that enables users of general purpose financial reporting to understand the specific entity’s:

1. Governance —the governance processes, controls and procedures an entity uses to monitor and manage climate-related risks and opportunities;
2. Strategy—the climate-related risks and opportunities that could enhance, threaten or change an entity’s business model and strategy over the short, medium and long term, including:
3. Risk management—how climate-related risks and opportunities are identified, assessed, managed and mitigated by an entity;
4. Metrics and targets—the metrics and targets used to manage and monitor an entity’s performance in relation to climate-related risks and opportunities.

Next Steps

In order to ensure the disclosure standards will be developed in an inclusive, high quality, and transparent process (similar to that developed for the IFRS Accounting Standards by the IASB), the ISSB is opening a 120 day consultation period which gives stakeholders the opportunity to receive feedback on these proposals. They have stressed that the relevance, effectiveness, and interoperability of these standards will depend on the feedback received, therefore are urging all relevant stakeholders to get involved in the feedback process.They aim to take this feedback into account, then finalise, and issue the new Standards by the end of 2022