ISSB proposes climate sustainability standards
The International Sustainability Standards Board unveiled two proposed standards Thursday for general sustainability-related disclosure requirements and specific climate-related disclosure requirements as the new board tries to set unified rules for companies around the world.
The ISSB was established last fall under the oversight of the International Financial Reporting Standards Foundation, which also oversees the International Accounting Standards Board, in an effort to bring together the various sustainability standard-setters at the urging of global financial regulators. These are the first proposed standards by the newly formed ISSB, but the exposure drafts build upon the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) and incorporate industry-based disclosure requirements derived from standards developed by the Sustainability Accounting Standards Board.
The ISSB is looking for feedback on the proposals over a 120-day consultation period that closes July 29, 2022. It plans to review feedback on the proposals in the second half of 2022 and hopes to issue the new standards by the end of the year, based on the comments received. The move comes only a little over a week after the Securities and Exchange Commission proposed its own set of climate-related disclosures for public companies in the U.S., which also cites the TCFD framework (see story). Companies around the world have come under increasing pressure to make disclosures about their climate risks and what they are doing to combat the advance of climate change, especially as environmental, social and governance (ESG) funds grow in popularity.
The ISSB said the final requirements would form a comprehensive global baseline of sustainability disclosures designed to meet the information needs of investors in assessing enterprise value. It’s been working closely with other international organizations and jurisdictions to support the inclusion of the global baseline into their jurisdictional requirements.
“Rarely do governments, policymakers and the private sector align behind a common cause,” said ISSB chair Emmanuel Faber in a statement. “However, all agree on the importance of high-quality, globally comparable sustainability information for the capital markets. These proposals define what information to disclose, and where and how to disclose it. Now is the time to get involved and comment on the proposals.”
The proposals were developed in response to requests from G20 leaders, the International Organization of Securities Commissions (IOSCO) and others for enhanced information from companies on sustainability-related risks and opportunities. They include requirements for the disclosure of material information about a company’s significant sustainability-related risks and opportunities that are necessary for investors to weigh a company’s enterprise value.
Later this year, the ISSB plans to consult on its future standard-setting priorities. The consultation will look for feedback on the sustainability-related information needs of investors when determining enterprise value and on further development of industry-based requirements, building on SASB Standards, which address a wide range of sustainability matters. The ISSB also laid out its plans Thursday for how its work will build on the SASB Standards and industry-based standard-setting processes.
The initial proposals received some early positive feedback. “IOSCO welcomes the publication of the ISSB’s two proposed IFRS Sustainability Disclosure Standards,” said IOSCO chairman Ashley Alder in a statement. “We will review the proposals, with the objective to endorse them for use by our member jurisdictions. Endorsement by IOSCO can pave the way for adoption of the standards around the world, delivering much-needed consistency and comparability in sustainability-related information to the capital markets.”
“By building on the TCFD’s framework, the ISSB’s climate proposals will create further consistency, comparability and reliability across climate disclosure so investors can make more informed financial decisions,” stated Mary Schapiro, head of the TCFD Secretariat and a former chair of the Securities and Exchange Commission. “I welcome and support the ISSB’s work, which will bring further transparency on the financial impacts of climate change.”
The Carbon Disclosure Project also applauded the news. “CDP welcomes the publication of the ISSB’s exposure drafts,” said Pietro Bertazzi, global director of policy engagement and external affairs at the CDP, in a statement. “The development of the world’s first global baseline standard for climate-related financial disclosure is a landmark moment in environmental disclosure and will pave the way to more transparency, accountability and efficiency within global financial markets. The most effective and impactful standards are developed in collaboration.”
Auditors could also benefit from the proposals. “With the release of the first two proposed standards today, the ISSB is taking an important step in connecting sustainability information and financial reporting,” said KPMG’s global head of audit, Larry Bradley, in a statement. “The creation of globally consistent and transparent sustainability reporting standards will help strengthen the capital markets by helping investors and business leaders make more informed decisions and refresh their focus on building the long-term value of their business.”
Audit committees will need to pay attention too. “In terms of ISSB, companies that are doing business internationally are going to keep an eye on those requirements as well,” Kris Pederson, who leads the Ernst & Young Americas Center for Board Matters, told Accounting Today. “You can’t just think about TCFD if you’re an international player. You’re going to have to keep your eye on the ISSB requirements. We’re hoping there will be good overlap because the TCFD framework has been such a driver of voluntary climate disclosures so far, so hopefully there will be a lot of dovetailing on the two frameworks, but companies definitely need to keep their eye on the ISSB and understand how that would impact their reporting.”
“What SEC registrants, whether it be boards, audit committees, other committees of the board, or management teams are really hoping for is standards where they know how to apply them, that they are clear and consistent, and that once this proposal becomes official, when and if, that they really understand the ground rules and what is expected of them so that they meet not only the letter of the law, but also the spirit of the requirements,” said Patrick Niemann, leader of the Ernst & Young Americas Center for Board Matters’ Audit Committee Forum. “The vast majority of companies with whom we interact really want to do the right thing on the climate front, and consistency in application will help them to meet the spirit of the requirements for sure.”
Although the ISSB is setting up international standards, and the SEC is proposing its own set of climate-related disclosures, the two could well fit together. “I think the fundamental approach to the IASB approach so far has really been through a jurisdictional approach,” Faber said at the Bloomberg Sustainable Business Summit in London. “Basically countries would look at our standards and in principle they would be adopting those standards. They would look at the next standards and they use it in their jurisdictions and they make it mandatory. But I think today there is also another opportunity, particularly when it comes to climate, and even beyond that, which is direct market adoption by market participants — investors, companies that have already embarked. In the U.S., there are the fantastic SASB Standards that are industry-specific and that we expect to consolidate in a few months with them. The SASB Standards are used by thousands of companies, so we expect that on top of jurisdictional adoption, all of our metrics and standards, there could be direct market adoption. This is probably where there could be a combination with what the SEC has put out for consultation in their rule for climate on which we can be complementary, bringing additional requirements, which in total would fully meet investors’ needs when it comes to climate disclosure.”
However, Faber said he doubts the U.S. would adopt the ISSB standards in total from a legal standpoint. “I don’t think the SEC is going to say, let’s take and adopt everything,” said Faber. “We are working with jurisdictions, including the U.S., in order to make sure our standards are going to be supplemental, complementary and compatible with their rulings, and this is where the dual approach of jurisdictional dialogue and engagement, and market dialogue and engagement, is for us.”
The ISSB’s proposals build on the work of the Climate Disclosure Standards Board, the International Accounting Standards Board, the Value Reporting Foundation (which houses Integrated Reporting and SASB Standards), the TCFD and the World Economic Forum.
Development of IFRS Sustainability Disclosure Standards follows due process in accord with the process used to develop IFRS accounting standards. As required by the IFRS Foundation’s Constitution, the IFRS Foundation Trustees’ Due Process Oversight Committee has overseen the decision by the ISSB chair and vice-chair to publish these exposure drafts before the ISSB has been fully formed.
Initial proposals for an IFRS Sustainability Disclosure Taxonomy, allowing structured electronic tagging of a company’s sustainability disclosures, are expected to be published in the near future.
The ISSB has issued a snapshot document providing a high-level summary of the requirements and plans to host two webinars on April 28 to discuss the proposals.