ISSB prioritizes climate-related disclosures in upcoming standards
The International Sustainability Standards Board decided during a meeting Tuesday that it will initially allow companies to focus on disclosures around climate change when they issue reports based on the ISSB’s first two draft standards.
In March of last year, the ISSB proposed two standards around general sustainability-related disclosures and more specific climate-related disclosure requirements. During a symposium in February, ISSB chairman Emmanuel Faber said the ISSB plans to publish the standards at the end of the second quarter of this year within an effective date of 2024.
“The upcoming introduction of the ISSB’s standards establishing the global baseline is being welcomed by companies urgently looking for tools to meet the information needs of their investors,” Faber said in a statement Tuesday. “This transitional relief ensures companies can phase in their approach, initially focusing on the quality of the climate-related information they provide. That said, companies around the world are not all starting from the same place. We expect many of the companies that already disclose information beyond climate to continue to do so, including the 2,500 plus companies already applying the SASB standards.”
The ISSB standards essentially incorporate the standards inherited from the Sustainability Accounting Standards Board and other environmental, social and governance standard-setters after the ISSB merged in SASB as part of the consolidation last year of various ESG standard-setters, including SASB and the International Integrated Reporting Council, which had been previously merged together under the auspices of the Value Reporting Foundation, as well as the Climate Disclosure Standards Board. By consolidating together the various standards, the ISSB aims to make the standards less confusing to apply. In addition, as the ISSB is under the auspices of the International Financial Reporting Standards Foundation, which also oversees the International Accounting Standards Board, sustainability standards and accounting standards will align more closely as well.
The relief granted Tuesday would help companies focus their initial efforts on ensuring they meet investor information needs around climate change. Companies would be able to prioritize putting in place the reporting practices and structures needed to provide high-quality information about climate-related risks and opportunities in the first year of reporting using the ISSB standards. They would then need to provide full reporting on sustainability-related risks and opportunities, beyond climate, from the second year.
Companies would be able to use their first year of reporting to gain more familiarity with the concepts and requirements within the ISSB standards, while undertaking exercises to get their systems in place, using climate first, before reporting on other sustainability-related risks and opportunities.
The ISSB pointed to the example of companies being able to benefit from this transition relief, in tandem with the one-year relief from providing Scope 3 greenhouse gas emissions, to understand and map their value chain. This will enable them to prepare for reporting on other sustainability-related risks and opportunities that arise in their value chain. Scope 3 emissions include those from vendors, suppliers and customers, but the requirement for including disclosures about them has generated some controversy from many companies, who are asking the Securities and Exchange Commission to drop the requirement from its own proposed rule on climate-related disclosures that is currently awaiting finalization as well.
The ISSB noted that investors have indicated that while they need consistent, comprehensive sustainability-related information across all risks and opportunities to inform their investment decision-making, the need for disclosures about climate-related risks and opportunities is the most urgent.
The full package of relief means, for the first year they use the ISSB standards, companies will not need to provide disclosures about sustainability-related risks and opportunities beyond climate-related information; provide annual sustainability-related disclosures at the same time as the related financial statements; provide comparative information disclose Scope 3 greenhouse gas emissions; not use the Greenhouse Gas Protocol to measure emissions, if they are currently using a different approach.
Furthermore, the ISSB decided that companies that only report on climate-related risks and opportunities in the first year should be provided with additional relief from providing comparative information. This means they don’t need to provide comparative information about their sustainability-related risks and opportunities beyond climate in their second year of reporting.
Companies will still need to apply the S1 standard in the first year they use the ISSB standards to meet general disclosure requirements where they relate to climate, the ISSB noted. For example, S1 spells out the approach to materiality and requirements for connectivity of information with that in the financial statements, which the ISSB said are relevant to the disclosure of climate-related information.
The ISSB standards, like the IFRS standards, will also have to be adopted by national regulators and standard-setters to be authoritative in those countries or jurisdictions.
“Groups like SASB and the IIRC have been around for quite some time, but they’ve always been viewed as nonauthoritative” said Mark Lamonte, an advisory partner at the WilliamsMarston, who contributed to a report released last week by COSO on achieving effective internal control over sustainability reporting. “This was reporting that companies were doing voluntarily and, in doing it voluntarily, you had a number of different frameworks out there. Companies were kind of picking and choosing and applying those frameworks in ways that worked for them. Now, with this becoming more often than not mandatory reporting, or reporting that is promulgated by some type of regulatory or formal standard-setting body, like the Securities and Exchange Commission, or the ISSB, to the extent local securities regulators adopt ISSB standards into their reporting requirements. The ISSB standards won’t be authoritative on their own. They will need to be adopted by some securities regulators into more formal reporting. But to the extent that these standards are adopted by regulatory authorities, it just really heightens the challenge and the risk for companies as opposed to when they were doing this voluntarily.”
The ISSB said its S1 and S2 standards would be issued toward the end of Q2 , following extensive market feedback to inform their development. S1 is the standard with general requirements for disclosure of sustainability-related financial information, while S2 is the standard for more specific climate-related disclosures. Then in May, the ISSB plans to consult on its future priorities for standard-setting and will be seeking feedback on four projects — biodiversity, human capital, human rights and integration in reporting — to further understand its standard-setting priorities.
