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ISSB’s Enterprise Value Lens a “Natural” Fit for Investors – NBIM

The board’s promises of additional guidance and support were welcomed at the IFRS Sustainability Symposium.  

The International Sustainability Standards Board’s (ISSB) primary focus on enterprise value (EV) within its general sustainability reporting standard will ensure corporate disclosures have a “laser focus” on the most decision-useful information for investors, according to Norges Bank Investment Management (NBIM).  

“Using the financial materiality filter is really important to meet the succinct information requirements of investors around sustainability issues that can directly affect companies’ costs, revenues, risks, and even the long-term viability of their business models,” said Elisa Cencig, Senior ESG Policy Advisor of the US$1.2 trillion Norwegian sovereign wealth fund, during the IFRS Sustainability Symposium last week.  

The panel discussion reflected on feedback to the ISSB’s draft general sustainability standard, which will require companies to outline their dependencies on, and the risks of, natural ecosystems and human capital to their business over the short- to long-term. The proposal was published last year alongside a climate reporting standard, with both aiming to serve as a global baseline that can be adopted by all jurisdictions. 

“For the ISSB to succeed in its mission to provide a global baseline, we see it as absolutely important [that the board] upholds this laser focus on financial materiality,” Cencig said.  

However, one of the biggest sticking points amongst respondents was whether the term enterprise value is “too narrow” for investors who want to understand the full scope of impact portfolio companies have on sustainability and climate-related themes, according to Verity Chegar, an ISSB Board Member.  

“We have confirmed that our [financial] materiality definition will be the same as the definition used by companies complying with the IFRS accounting standards,” said Chegar. 

NBIM’s Cecig welcomed this decision, noting that EV is the “natural lens” for a long-term investor, with alignment between the ISSB and International Accounting Standards Board (IASB) terminology providing a “sound basis for companies to assess what kind of sustainability information they need to disclose to their investors”.  

Nonetheless, Cecig acknowledged the growing importance of double materiality-focused reporting, where companies disclose how sustainability issues are impacting their business, as well as the organisations’ impact on sustainable development beyond their internal operations. 

“We do recognise that companies need to report more broadly on sustainability and should consider the wider environmental and social consequences of their business operations,” she said, adding that NBIM supports the European Sustainability Reporting Standards (ESRSs) that have been developed by the Global Reporting Initiative (GRI) and European Financial Reporting Advisory Group (EFRAG).  

“NBIM sees the ISSB and ESRSs as complementary,” Cecig said. 

As the ISSB finalised the technical content of its initial standards last week, it also voted to reference the ESRSs as a source of guidance for firms reporting under its general requirements standard (S1) in the absence of a specific ISSB standard.  

Issuing guide rails 

To address respondent concerns around the potential drain on resources, the ISSB will introduce more guidance and illustrative examples to help companies build their reporting capabilities. 

“The fact the ISSB has recognised that there are different levels of preparedness and capability to comply with the general sustainability standard is really crucial if this work is to ultimately be embraced globally,” said Gabriela Infante, Director of Corporate ESG at T Rowe Price. 

This guidance will be especially important when it comes to companies preparing their Scope 3 disclosures, according to panellists.  

Following investor calls for more information on portfolio companies’ Scope 3 emissions, the board determined during its October and December meetings last year that companies will be asked to provide Scope 3 disclosures in line with the GHG Protocol Standards.  

As well as promising to provide support through implementation guidance, scalability measures and a framework for measurement, the ISSB further plans to introduce ‘reliefs’, providing companies with a one-year exemption from Scope 3 disclosures, ensuring they have time to establish processes and procure the necessary data.  

However, some have questioned whether the inclusion of Scope 3 in its standards goes beyond the ISSB’s core purpose.  

Practical targets 

In the long-term, the ISSB will expect companies to align their sustainability disclosures and fiscal reporting cycles. 

“It’s important to achieve the integration of sustainability information into financial disclosures, as sustainability issues can directly affect financial statements,” said NBIM’s Cecig, noting that routine assessments of the life of assets will account for the effects of long-term sustainability risks, such as climate change. 

However, ISSB’s Chegar noted that respondents said immediate alignment between sustainability and financial reporting cycles would be challenging, as “many are not yet reporting on [sustainability in] the same cycle as their fiscal reporting cycle”. 

The ISSB considers this to be a practical challenge, but one that is temporary. 

“We made the decision to keep the requirement that, in the long-term, companies will be expected to report their sustainability information at the same time as financial information, but there will be a short-term allowance where companies can publish their sustainability disclosures at the same time as their Q2 earnings reports instead,” said Chegar.  

Yasunobu Kawanishi, Chair of the Accounting Standards Board of Japan (ASBJ), said that, while the idea of disclosing sustainability and financial information at the same time is “very appealing”, it’s important that the ISSB has acknowledged companies across different jurisdictions have “different starting points”. 

Producing all of that information for the same period will also require companies to procure additional resources so they can meet the reporting deadline, he added. 

“There are some concerns within our jurisdiction that the ISSB’s one-year exception [on reporting alignment] is too short. The board might consider more permanent relief for certain circumstances and situations.” 

Both the ISSB’s general sustainability and climate standards are now expected to be issued at the end of Q2 2023, becoming effective starting January 2024. 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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