The standards are intended to provide a baseline for sustainability disclosures that can be widely adopted globally, giving investors insight into how companies are tackling climate change-related impacts.
The International Sustainability Standards Board (ISSB) has published its inaugural standards for corporate climate and sustainability reporting, IFRS S1 and IFRS S2, which, if adopted widely, will allow investors to compare how companies are adapting their business strategies to take account of climate change, and related social and natural world impacts.
IFRS S1 requires companies to provide a set of disclosures to provide investors with a view of sustainability-related risks and opportunities faced over the short, medium and long term.
IFRS S2 addresses climate-related disclosures specifically and is designed to be used in tandem with IFRS S1.
The ISSB said the standards are intended to provide a global baseline for company disclosures on sustainability that could be widely taken up. It said the rulebooks for the standards had incorporated all of the recommendations of the G20’s Task Force on Climate-related Financial Disclosures (TCFD).
“The ISSB Standards have been designed to help companies tell their sustainability story in a robust, comparable and verifiable manner. We have consulted closely with the market to ensure the standards are proportionate and will result in disclosures that are relevant for investment decision-making,” ISSB chair Emmanuel Faber said.
The ISSB, which operates under the umbrella of the IFRS Foundation, was created at the 2021 COP26 climate conference in Glasgow with the backing of G20 countries and organisations including the Financial Stability Board and the International Organization of Securities Commissions (IOSCO), as well as high profile business leaders and investors.
Faber told the IFRS Foundation’s annual conference that the value a company creates for itself, or its shareholders is “inextricably linked to its business ecosystem: the civil society in which it operates, the human capital that it employs the natural resources that it has to use and deploy”.
In an effort to make adoption easier, the standards are built on IFRS Accounting Standards, already required by more than 140 jurisdictions. They are also designed to enable companies to provide sustainability-related information alongside financial statements in the same reporting package, the ISSB said.
Those adopting the ISSB standards will be able to phase in some elements over time in an effort to ease the reporting burden in the early stages and encourage uptake. This includes, among other measures, the ability to defer reporting under IFRS S1 by a year, restricting reporting in that period to the easier-to-measure climate change-focused IFRS S2, and at least a year’s delay in reporting on harder-to-measure Scope 3 greenhouse emissions.
The ISSB standards join a crowded, acronym-heavy field of sustainability standards emerging to drive both mandatory and voluntary private sector action on climate change and its impact on people and nature, which is also being encouraged by high-level international forums.
Harmonisation challenge
While the standards have heavy-hitting backers, if they are to gain traction they will need to be adopted globally by national and international regulatory bodies or adopted voluntarily by companies. That could prove challenging, given they need to gel with a number of alternative reporting frameworks – and overcome resistance to tighter sustainability reporting requirements in some quarters, notably the US corporate sector.
The Amsterdam-based Global Reporting Initiative (GRI), which has developed its own sustainability reporting standards, welcomed the ISSB standards, which marked a “significant milestone”, according to GRI CEO Eelco van der Elden.
“Our respective standards have distinct yet complementary purposes; with GRI ensuring transparency on an organizations’ impacts on people and planet, while the ISSB is focused on supporting efficient and resilient capital markets. Taken together, I believe our standards can provide the complete picture on sustainability impacts and performance,” he said.
Richard Barker, professor of accounting at the Saïd Business School at the University of Oxford and an ISSB member, said that proposing change was one thing, but the next step of getting a global agreement on standards would be challenging. The ISSB now needed to persuade more countries and jurisdictions to adopt the standards, or ensure that where other standards are being used, such as in the EU, they are interoperable.
“The launch of these standards is a major step towards a global baseline of investor-oriented sustainability reporting. There is now much more to do, not least ensuring mandatory adoption across jurisdictions globally,” he said.
The ISSB said its next step would be to create a Transition Implementation Group to support companies that apply the standards, and that it would work with regulators and the GRI to develop effective reporting where the ISSB Standards were applied in combination with other reporting standards.
The European Commission is due to finalise its European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD) after a July 7 deadline for stakeholder feedback on proposed changes announced in June.
The EU standards, which are intended to be mandatory, have a wider scope than the ISSB standards. While the ISSB standards require companies to report only on how sustainability issues impact their business and value chain (so-called single materiality), the EU regulations require they also report on how business impacts on environment and society (double materiality). In common with the ISSB standards, the EU’s latest draft of its standards also include the ability to phase in some aspects of the regulations – a move which some critics said would water down their impact.
